JANUARY 2006

Fixing Workers' Comp: Real Reform or Just Another Band-Aid?
By Erika Rosenfeld

Injuries to and the death of factory and other workers from all manner of incidents and accidents were common throughout the industrialized world from the early 19th century on. In response, Germany established the equivalent of a workers' compensation program in 1856, followed soon thereafter by England and other western European countries. But the U.S. lagged behind, until a singular catastrophe:

In 1911, the Triangle Shirtwaist Factory, located on the top three floors of a building in New York City's Greenwich Village, caught fire. The exit doors were locked from the outside. Fabric burns quickly, but lint burns explosively, and in barely 15 minutes, 146 women died.

At the time, injured workers had no option but to sue, and it was up to them to prove negligence on part of the employer. Lengthy court proceedings left workers waiting, often fruitlessly, for compensation and medical care, and employers were saddled with heavy legal costs. Recognizing that this system was detrimental to both sides, New York State employers and workers reached an agreement, as a result of which, in 1914, the New York State Workers' Compensation Board was created, establishing what is in effect a no-fault system that ensured quick and guaranteed medical care and compensation for lost wages for workers and protection for employers against lawsuits. (Though New York State is usually cited as the first to establish workers' compensation, it was Wisconsin that led the way, in 1911. New York enacted a law in 1910, but it was found to be Unconstitutional.)

Much has changed in 91 years. All states have workers' compensation statutes, and only in Texas is it genuinely optional. It remains state-based, and there are considerable variations in costs and levels of compensation among states. The establishment of other, typically federal programs – social security and Medicare and Medicaid, for instance – as well as private health care insurance has led in some situations to overlapping coverage. New York State may stand out for its paradox: as Larry Gilroy, chairman of the New York Workers' Compensation Action Network (NYCAN), said, "The business community says it's a high-cost system; labor says it's a low-benefit state." Gilroy is also a member of IIABNY, which is among the insurance industry associations active in pressing for reform. But every state in the country is looking for ways to control sky-rocketing costs. And virtually everywhere, workers' compensation no longer functions as it was intended to.

The System is Broken

Even without the variations among the states, workers' compensation is so complex, and the methods for gathering and analyzing the data so diverse, that it is difficult to distinguish facts from conclusions. But some things are incontrovertible. According to the Insurance Information Institute (I.I.I.), in a website white paper dated June 2005:

Until recently, many states lacked treatment guidelines, an important element in limiting expenditures.

The growth in workers' compensation medical costs has been far steeper than in the health care industry overall. While in 1983, indemnity costs – that is, payment for lost wages – represented about 56 percent of the total, by 2003, they had switched places with medical costs.

A major issue throughout the country is the imbalance between levels of compensation for various degrees of impairment – some are over-compensated, others under-compensated.

Although the number of claims filed has declined, the size of the claims continues to rise with the growing cost of medical treatment.

Workers' compensation was designed to do away with litigation, but attorneys are involved in about 5-10 percent of all claims in most states, and attorneys' fees are a factor in driving up costs.

Fraud remains a significant concern.

From the point of view of labor, the picture is no better. If in some states the benefits are overly generous, in others they are woefully inadequate. Arguments by critics of labor notwithstanding, studies show clearly that people want to return to productive employment as quickly as possible. It is also the case that the faster an insurer receives notice of an injury and can initiate medical treatment, the faster the worker recuperates and returns to work. Nonetheless, in many jurisdictions, that process can take months.

New York State last passed reform measures in 1996 and, according to Governor George Pataki's office, average costs were reduced by 25 percent in consequence. But workers' compensation is a moving target, and everyone agrees that the trigger for the current reform proposal, introduced by the governor on November 3, was Delphi Corporation. Spun off from General Motors in 1999, Delphi is the largest manufacturer in western New York State and, with 3,800 employees, the largest employer in Niagara County, according to a Buffalo News article. It is also in bankruptcy, and the company cites workers' compensation costs as a major factor, claiming that it adds some $3 an hour to employment costs in the state, significantly more than in other U.S. locations.

Though Pataki's proposal, described as "comprehensive workers' compensation reforms," emphasizes manufacturing businesses, it is far from the only sector with especially high costs. The food service industry suffers as well. According to Michael Moran, director of public affairs for AIA's Northeast Region, Price Chopper, the large grocery store chain, has testified that their workers' compensation costs in New York State are much higher than in Vermont, New Hampshire, and Massachusetts. Long-term care workers, too, have a very high rate of injuries, making their workers' compensation expensive. And office work, traditionally among the safest occupations, is now potentially high-risk, especially in large cities. Moran, among others, pointed out that 9/11 generated an enormous number of workers' compensation claims. Even with TRIA, he said, the potential losses "are huge."

Can It Be Fixed?

The last round of widespread workers' compensation reform legislation took place in the late 1980s, according to the I.I.I., and gave employers and insurers better control of medical costs. Now, the institute said, states are facing another crisis as new problems arise. And they are acting. While not all bills have yet been passed or signed by the respective state's governor, many states are considering measures similar to those proposed for New York.

Changes in Oklahoma include the creation of medical fee and prescription drug schedules, limits on attorneys' fees, and higher fraud penalties. Missouri, too, is focusing on limiting the amount attorneys can collect in workers' compensation cases and on reducing abuse. Alaska's bill would allow employers to create preferred medical care provider networks. And Virginia – one of only five states with a "monopolist" state fund from which all but self-insured employers must buy coverage – is working on a plan to privatize its system.

California provides the most valuable information on the efficacy of reform, if claims by Insurance Commissioner John Garamendi are accurate. That state's 2004 reforms are "beginning to reduce claims and thus rates," he said. There is "actuarial evidence that the reforms are working." Garamendi stated last summer that, by year's end, premiums should be 36.5 percent lower than when the law was first passed. Among the significant changes to the California system were permitting employers and insurers to establish medical provider networks. These are expected to generate major savings, in part because they are staffed by experts and follow established medical care guidelines. (This provision, however, is being challenged in court on the grounds that it violates workers' rights to maintain existing doctor-patient relationships). Another measure requires the adoption of a more objective means for assessing the degree to which a worker is disabled; the state now requires the use of American Medical Association guidelines, to ensure fairness and consistency. And benefits for Permanent Partial Disability (PPD) are now based on lost earning capacity.

It Depends on What You Mean by Compensation

Sadly, it goes without saying that, in New York at least, labor and business are at odds over workers' compensation. No small part of the divide is occupied by the question of what compensation really means. If one consults the dictionary, it reads:

com·pen·sa·tionn. Something, such as money, given or received as payment or reparation, as for a service or loss.

Larry Gilroy noted that "if you're injured on the job, the goal of compensation is to make you whole." Most businesses and insurers hold that, in effect, that means economically whole and that an injured worker is compensated by the insurer's payment of the associated medical costs and by indemnification for lost wages. But in testimony before the NYS Senate Labor Committee, in March of 2004, Denis M. Hughes, president of the NYS AFL-CIO, said of a worker who loses a finger or an eye, "In neither of these extreme cases does the person ever regain their sight or full use of their hand." In other words, that person can never be literally made whole and is thus permanently partially disabled.

But Michael Moran and many others point to that category of injured worker, the PPD, as the source of much of the problem for both business and labor. New York, he explained, is among the few states that allow lifetime indemnity benefits; others have some kind of cap. "That's one of the biggest cost drivers," he noted. "While only a small proportion of PPDs are paid for life, they represent more than 70 percent of the cost." The average PPD award in New York, he continued, is 22 percent higher than the national average.

The result is as disadvantageous to labor as it is to business. Larry Dickson pointed out that the compensation for permanent total disability is two-thirds of the employee's wages, from a minimum of $40 per week to a maximum of $400 per week. However, permanent total disability is rare; PPD is more common, but the maximum award is lower. It is hard, too, to dispute Denis Hughes' claim that, while in 1992 $400 represented 66 percent of a New Yorker's average weekly wage, in 2004 it came to only 44 percent. Virtually no one disputes that $400 does not adequately indemnify a worker whose injury takes him, for however long, out of the workplace.

Labor, on the other hand, has produced no realistic proposals, said Michael Moran. He notes that labor has talked about eliminating the private insurance market (and Hughes' testimony makes a direct attack on the insurance industry). That, Moran explained, would make the New York State Insurance Fund the only reinsurer, which is unrealistic. "The fund doesn't have the capacity," he noted, especially for a catastrophe. The California state fund almost went under. And eliminating private insurance would do nothing for costs."

Band-Aid or Major Surgery?

Dickson makes a strong argument that truly reforming workers' compensation has to do with more than dollars and that there are other significant issues that prevent the system from benefiting either side in the debate. "There's a very high level of distrust [between business and labor]," he said. "Some believe that people go to work to get injured [deliberately], but if you look at the benefits, that makes no sense." Further, he said, "If I were hurt and I showed up in the emergency room of a New York hospital, the last thing I would claim is that I was hurt because of what happened at work." For one thing, he pointed out that non-emergency procedures costing more than $500 require approval (Pataki's proposal raises the figure to $1,000), which could take months.

"There is something like a 15-20 percent avoidance of workers' compensation by employees," he continued. "The worker doesn't want to admit to a workplace injury because his primary concern is being medically treated, and workers are not comfortable with the workers' compensation system." On the business side, Dickson cited evidence that 60 percent of the medical bills for workers' compensation are in error, and that no two hospitals necessarily charge the same fees. Electronic billing and reimbursement would help, he believes, but "there is a lot of reluctance to do that."

Overall, Dickson believes that workers' compensation – essentially an insurance policy – has "morphed into this thing where everybody loses, nobody wins, and there are way too many people with their fingers in the pie." The answer, he said, is not just significant reform, but fundamental change: "That means what was the original intent and how can the system become more efficient? Other kinds of insurance products have benefited from efficiencies and they work better – they serve better the people they are supposed to serve." By way of example, he pointed out that life insurance companies process thousands of death claims annually, requiring only a death certificate. Companies providing disability insurance also process thousands of claims quickly and simply. "But if it's workers' compensation," he said, "it's about hearings, it's much more involved, it's a much longer and more frustrating process."

The immediate problems, Gilroy said, are not new, but "you need some type of urgency" to drive reform. And the canary in the NYS workers' compensation mine is Delphi – hence the governor's proposals. While Dickson is not alone in believing that more fundamental and comprehensive change is necessary, most businesses welcome the prospect of any reform. How likely it is that the current proposed reforms will pass and take effect is a bet no one wants to make.

"It's the million-dollar question," Gilroy said. Some people want to wait [until the next gubernatorial election], others say we need to get this done. It's a bill that brings out strong feelings on all sides. The Legislature, he believes, is not looking forward to working on the issue because of strong pressures from constituents on both sides of the table. If some believe the proposals do not go far enough, Moran pointed out that, "given how out of whack New York is, this is substantial, serious reform." And it is, at least, a starting point, he said, for negotiations, though he does not believe it will pass as is.

"It's easy," Gilroy said, "to understand that $400 a week is too low, but if you raise that, you also have to address costs. I'd just as soon not insure the last manufacturer in the state."

How Much Does Safety Matter?

There is no question that work today is safer than it was a century ago, not only because of changes in manufacturing technology, for instance, but also because of the increased awareness on part of the business community of the advantageous cost/benefit ratio in making the workplace safer. Michael Moran pointed out that there is pressure on employers to reduce injuries, and that most insurers have safety experts who work with policy-holders and the unions to identify problem areas and institute safe practices.

So does safety pay? The Buffalo News article notes, in the context of Delphi's worker compensation costs, that the company's injury rate is 50 percent higher than industry averages. Since the rate and severity of injury are factors in setting premiums, safer is surely better. Adam Friedlander, president of the Friedlander Group, described specific advantages available to New York businesses. His company manages safety groups underwritten by the State Insurance Fund, which offers discounted programs, fully insured, for businesses that are safety-conscious and have a track record of low claims relative to the premium. The advance discount is 25 percent, but because the program is not-for-profit, Friedlander explained, annual profits are returned to group members. Since 1992, those dividends have averaged 37 percent, on top of the initial 25 percent.

But Friedlander is adamant that safety-consciousness has to be a philosophy of management, not a cost-saving measure. "[Is management] doing this because they are caring people, or because of workers' compensation [costs]?" he asked. A company that genuinely cares for its workers will have fewer injuries and lower claims, he says; safety programs are not in the first instance a tool for lowering claims.

A striking example of Friedlander's principle is Alcoa, the aluminum manufacturing giant. Though it deals with one of the most hazardous manufacturing processes, as of October 31, Alcoa posted a worldwide lost workday rate for 2005 of 0.087, representing the number of injuries resulting in a lost workday per 200,000 hours worked. Nearly 50 percent of the company's 356 locations had zero injuries as of that date, and 99.88 percent of Alcoa employees had zero lost workdays.

The resulting benefits in reduced workers' compensation costs are secondary: Alcoa has made safety the highest internal priority and has as a long-standing goal zero work-related injuries. Nor is safety an issue only in the company's mining and manufacturing operations. Throughout its headquarters, employees are constantly reminded of Alcoa's safety procedures and objectives, and the company safety rate is continually calculated and displayed in real time.

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