Workers Compensation
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THE TOPIC
NOVEMBER 2008
Workers compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job. It also compensates them for lost wages and provides death benefits for their dependents if they are killed in work-related accidents, including terrorist attacks. The workers compensation system is the “exclusive remedy” for on-the-job injuries suffered by employees. As part of the social contract embedded in each state’s law, the employee gives up the right to sue the employer for injuries caused by the employer’s negligence.
Workers compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive and the strategies used to control costs.
Workers compensation costs are one of the many factors that influence businesses to expand or relocate in a state, generating jobs. When premiums rise sharply, legislators often call for reforms. The last round of widespread reform legislation started in the late 1980s. In general, the reforms enabled employers and insurers to better control medical care costs through coordination and oversight of the treatment plan and return-to-work process and to improve workplace safety. Some states are now approaching a crisis once again as new problems arise.
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RECENT DEVELOPMENTS
State Activities
- Colorado: In a last minute deal, organized labor agreed to pull off the November ballot an initiative that would have gutted the exclusive remedy in workers compensation, which according to the national Council on Compensation Insurance (NCCI), could have cost Colorado businesses and insurers more $1.2 billion. The initiative, Amendment 57, would have required employers to provide a “safe and healthy workplace.” If an employer failed to comply with this requirement, an injured worker would have had a right to a trial by jury with potential awards not only for actual out-of-pocket losses but also for emotional distress, pain and suffering, inconvenience, mental anguish, loss of enjoyment of life and other nonpecuniary losses. Also removed were three other initiatives that could have caused significant damage to the state’s economy. In return, a broad coalition of businesses, including insurers, will work to defeat antilabor initiatives filed by a small group of businesses.
- Florida: Workers compensation rates have fallen significantly since a 2003 reform measure tightened the definition of permanent and temporary disability, improved physician reimbursement fees, improved dispute resolution procedures and limited the fees of attorneys who represent injured workers to a maximum of 20 percent of the award they obtain for their client. NCCI filed for an overall 14.1 percent rate decrease for 2009. However, Florida Insurance Commissioner Kevin McCarty has ordered an 18.6 percent reduction.
- Now the attorney fee provision that accounted for a large part of the drop in rates is being challenged. Prior to 2003 attorneys charged hourly rates, which in some cases far exceeded the amount of money they collected for their client. Trial attorneys are arguing in court that the fee limitation is unconstitutional in that there are no similar restrictions on the fees of defense lawyers who represent the workers compensation insurer and are asking the Florida Supreme Court to reinstate hourly rates. At the same time, injured workers with small claims complain that they cannot find attorneys to accept their cases. In the case before the court, Murray v. Mariner Health, the claimant’s attorney submitted a bill for 80 hours and asked the court to overrule the fee provision. The claimant received $3,224 in benefits. Oral arguments are scheduled for the fall of 2008.
- New Jersey: Six bills have been signed by the governor that together would give workers compensation judges greater enforcement power, require proof of workers compensation insurance for firms in certain types of business that state studies show routinely fail to purchase coverage, require injured workers to receive a hearing within five days on claims that they have been denied medical treatment recommended by their physician and add three noninsurance industry representatives to the state’s Compensation Rating and Inspection Bureau.
- New York: The base workers compensation rate will fall by 5 percent in 2009, according to Gov. Paterson, bringing the reduction in rates since reforms were enacted in 2007 to more than 25 percent. The state now sets the base rate calculated according to loss costs—the cost of claims only. Each insurer adds on a percentage for its administrative costs. This method of setting workers compensation rates, which is new to New York State, offers an incentive to each company to keep its part of the rate formula—administrative overhead—lower than the competition to increase its market share. Loss costs represent about 75 percent of the rate.
- Injured workers are benefiting also from the reform. Maximum weekly benefits will rise to $600 in 2009 and $650 in 2010. The following year they will increase to two-thirds of weekly earnings, the percentage that the system has traditionally aimed to provide in all states. In New York, before the reform, they were $400. Employers are seeing a reduction in premiums despite higher benefit levels, due mainly to a limit on the number of weeks an injured worker can receive benefits for permanent but partial disability. A task force set up under the reform legislation recommended that employers be required to submit data on a quarterly basis to help legislators track costs, analyze and monitor the system, and make the appropriate policy decisions.
- In 2008, treatment guidelines for lower back, cervical spine, knee and shoulder injuries that standardize how these injuries should be treated were put in place. Treatment guidelines, which are also used by auto insurers in the treatment of common auto accident injuries in some states, help workers get faster and more effective medical care.
- Delaware: In January 2007 the Delaware legislature passed SB1, a measure intended to make the state a more attractive place to do business by lowering workers compensation insurance premiums. Together the reforms are expected to save employers from 15 to 21 percent of current costs. The anticipated savings will come from the creation of a medical care fee schedule, which will set out charges for treatment, and from the development of health care practice guidelines or medical protocols for the treatment of injuries. The fee schedules will be established by a 17-member panel appointed by the governor, which would include nine doctors. The legislation also includes provisions governing lawyers’ fees in an effort to rein in legal costs and ensure that injured workers are aware of the fees and requirements aimed at speeding up payments to doctors. According to industry experts, this is the first major overhaul of the state’s workers compensation laws since benefits were first provided in the early 1900s.
- California: The Workers Compensation Insurance Board is recommending an increase of 16 percent, effective January 1, 2009. Nearly 11 percent of the requested increase reflects rising medical care costs. The recommendation does not take into account recent changes in the permanent disability rating schedule proposed by the Division of Workers Compensation, which add another 3.7 percent, see below. If the increase of 16 percent is approved, average rates in January 2009 will be $1.95 per $100 of payroll compared with a pre-reform rate of $4.81.
- An appeals court in San Francisco upheld numerical limits for treatments in a case where an injured worker sought to have the system pay for 76 visits to a chiropractor. The 2004 reform law set a limit of 24 visits. In its ruling in June, the court said that the Constitution does not require unlimited treatments and that it is up to lawmakers to decide on the details of what is appropriate and take measures to keep the system solvent. Some labor groups have complained that the reforms of 2003 and 2004 have deprived injured workers of necessary medical care.
- A report prepared by the California Workers Compensation Institute on the impact of reform legislation shows that in five of six types of services there were fewer visits and lower amounts paid per claim. The greatest decrease was in chiropractic manipulation and physical therapy, with visits decreasing by 68.9 percent and 16.3 percent respectively between pre-reform 2002 and post-reform June 2006, and payments by 74 percent and 61 percent. Studies by the state’s Division of Workers Compensation show that more workers have returned to work after injury since the passage of SB 899 in 2004 which included incentives to return to work at the former employer.
- South Carolina: In South Carolina, where soaring costs have been fueling large premium increases, Gov. Mark Sanford signed a comprehensive workers compensation bill in June 2007. The bill is expected to reduce fraud and abuse of the system. Better medical documentation is required for repetitive injury claims to show the conditions that produced the injury were work-related and not just due to the normal aging process and also for stress-related claims. In addition, the legislation closes the Second Injury Fund and requires insurers to file data on their administrative costs with the insurance department for review. In signing the bill, the Governor said that while the measure would remove some of the subjectivity from the system, workers compensation awards still fell short of being based on objective standards. The South Carolina workers compensation system had become so expensive that insurance companies providing coverage in the state were losing an average of 25 cents on every premium dollar, industry representatives say.
- Although the number of claims has dropped in South Carolina, as it has across the nation, due to advances in technology and safer machinery, claims costs (the size of claims) are rising. Workers compensation medical payments are growing faster in the state than in most others, attorney involvement in contested cases is higher than average and it takes longer to settle claims, according to NCCI Holdings. In September 2007 the Governor signed two executive orders, one requiring the use of American Medical Association guidelines for impairment assessments, which is currently used in about 30 other states, and the other requiring the state’s Workers Compensation Commission to approve attorney fees.
- The recommendation to dissolve the Second Injury Fund was prompted in part by an increase of 38 percent in the amount assessed employers and insurers to finance the Fund. Second Injury Funds were originally set up to make it easier for workers injured at another place of employment to be hired, see Background section, but have been eliminated in at least 17 states, including South Carolina, following the passage of antidiscrimination laws.
- West Virginia: On July 1, 2008 the state’s workers compensation business opened up to any insurer that meets state requirements. Before, coverage was only available from the state-run mutual company. In readiness for the change over, 147 insurers filed rates; twenty-three were new to the state, according to the insurance department. Three years ago, West Virginia embarked on a plan to privatize its workers compensation system. The state was one of five with a so-called monopolist state fund, from which all employers, except those that are self-insured, must purchase their workers compensation coverage. The privatization process was phased in. A private mutual insurance company was created in June 2005. Nevada went through a similar change several years ago, enacting legislation to begin the workers compensation privatization process in 1999. It now has a mutual insurance company. Some critics of the Ohio system, the largest monopolistic state fund, are urging the state to reconsider privatization which voters rejected in a ballot initiative in 1981.
- Other States: In Minnesota, a workers compensation advisory council could recommend a series of reforms to the legislature, including speeding up the claim payment process. In Nebraska, lawmakers heeded pleas for greater stability in medical costs by instituting a hospital fee schedule for the most common types of treatment for injured workers in the state, based on Medicare’s fee schedule. Nebraska joins 37 other states that have established some way of controlling in-patient hospital costs. The schedule, at 150 percent of Medicare, helps assure that injured workers will continue to have access to quality health care while reducing costs for employers.
- Financial Results: In May 2008 NCCI Holdings released its annual "State of the Line" workers compensation market analysis showing that in the 2007 calendar year the workers compensation system produced an underwriting profit for the second consecutive year. The combined ratio was 99 percent, a six-point deterioration from 2006, which generated the best underwriting result in at least 30 years and the first underwriting profit for the line since 1995. Much of the good news can be attributed to reforms in California. Because of the size of its economy, excluding California from the 2007 results would have pushed the calendar year combined ratio above 104 percent, NCCI noted.
- Workers compensation net premiums written (private companies and state funds) dropped to $44 billion in 2007, based on preliminary calendar year data, compared with $46.3 billion in 2006 and $47.5 billion in 2005. Private carriers accounted for 37.6 billion in premiums in 2007, with the remaining $ 6.4 billion going to state funds. Depopulation of the residual market continued in 2007. Premiums dropped to about $1 billion, down from $1.2 in 2006 and $1.4 billion in 2005, based on policy year data. The exodus from the residual market was greatest for large firms.
- Medical care costs in the workers compensation system continued on an upward climb, growing faster than overall Consumer Price Index medical care costs. They accounted for 59 percent of total workers compensation claim costs in 2007, compared with 41 percent for lost income payments. Twenty years ago in 1987, the medical component represented only 46 percent of total costs. But while medical care costs are pushing up the size of claims, known as claim severity, the number of injuries reported, or frequency, is still declining, with lost time claims falling 52.3 percent from 1991 to 2006 as the workplace become safer. (In the 1920s about one in four full-time workers sustained on-the-job-injuries, compared with six in 100 now.) The drop in frequency is expected to continue. The NCCI has found that frequency tends to decline in periods of economic slowdowns.
- Fee schedules have been established in many states to help control workers compensation medical care costs which are often higher than those for employer-sponsored group health care. According to a 2007 study by the National Council on Compensation Insurance which seeks to determine the effectiveness of state workers compensation fee schedules, fee schedules do control costs. They are most effective for physical therapy and primary care (e.g. office visits) and least effective for specialty medicine such surgery and radiology. However, regardless of whether a fee schedule is in place or not, higher utilization of services by workers compensation claimants (more treatment and more office visits) accounts for more of the difference in costs between group health care and workers compensation than the mark-up on medical care prices.
- Workplace Injury Rates: Workplace injury rates are now at the lowest level since the agency began tracking information in the 1970s, according to Bureau of Labor Statistics (BLS). BLS data show rates for private workplace injuries and illnesses dropped from 7.1 per 100 full-time workers in 1997 to 4.4 in 2006, the latest available data. In 2006 a total of 1.2 million cases requiring days off work or restricted duties were reported in private industry workplaces, down from 4 percent from 2005. The incidence rate for lost workday or restricted work cases has declined steadily from 4.1 cases per 100 full-time workers in 1990 to 2.3 cases per 100 employees in 2005, the lowest figure on record. BLS data also show that 5,488 workers were killed in on-the job-accidents in 2007, a drop of 6 percent from 2006, with the greatest decrease in transportation-related deaths.
- A study by the NCCI on claim frequency published in the summer of 2008 found that the rate of decrease is dropping. The number of claims has been falling since the 1990s, with decreases of 7 percent in 2005 and 2006 but only 2.5 percent in 2007. Almost every employment category NCCI examined has experienced declines. Severity, the cost of claims, has continued to grow, however. As part of the review, NCCI looked at changes in permanent total claims, the costliest 1 percent of lost-time claims, which have risen significantly over the past three years. From 2004 to 2006 the increase in permanent total claims may have increased the cost of the medical portion of total lost-time claims by as much as 2.5 percent to 3 percent a year, NCCI says.
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STATES WITH A STATE-RUN WORKERS COMPENSATION FUND
Competitive with Private Insurers |
Exclusive |
| Arizona | Maryland | Oregon | North Dakota |
| California | Minnesota | Pennsylvania | Ohio |
| Colorado | Montana | Texas | Washington |
| Idaho | New York | Utah | Wyoming* |
| Kentucky | Oklahoma | West Virginia** | |
*Compulsory for extra hazardous operations only. Employers with nonhazardous operations may insure with the state fund or opt to go without coverage.
**Changed to a competitive market 7/1/08. |
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WORKERS COMPENSATION LAWS FOR DOMESTIC WORKERS BY STATE (a)
As of July 2008
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Type of Law |
Threshold for Compulsory Coverage |
State |
Excluded (b) |
Voluntary (c) |
Compulsory |
Time Worked |
Earnings |
Other |
| AL | | X | | | | |
| AK | | X | | | | |
| AZ | | X | | | | |
| AR | | X | | | | |
| CA | | | X | 52 hours during 90 days prior to injury or exposure to disease | Or $100 during 90 days prior to injury or exposure to disease | Excludes a household worker employed by the worker's parent, spouse or child |
| CO | | | X | 40 hours per week or 5 days per week | | |
| CT | | | X | 26 hours per week | | |
| DE | | | X | | $750 per 3 months | |
| DC | | | X | 240 hours during quarter | | |
| FL | | X | | | | |
| GA | | X(d) | | | | |
| HI | | | X | | $225 per every quarter during preceding 12 months | |
| ID | | X | | | | |
| IL | | | X | 40 hours per every week for 13 weeks during year | | |
| IN | | X | | | | |
| IO | | | X | | $1,500 during 12 weeks prior to injury | |
| KS | | | X | | | Employer payroll $20,000 in prior year for all workers |
| KY | | | X | | | 2 employees, 40 hours per week |
| LA | X | | | | | |
| ME | | X | | | | |
| MD | | | X | | $801 per quarter | |
| MA | | | X | 16 hours per week | | |
| MI | | | X | 35 hours per every week for 13 weeks during preceding 52 weeks | | |
| MN | | | X | | $1,000 in any 3 month period of previous year | |
| MS | | X | | | | |
| MO | | X(d) | | | | |
| MT | | X | | | | |
| NE | | X | | | | |
| NV | | X | | | | |
| NH | | | X | | | |
| NJ | | | X(e) | | | |
| NM | | X | | | | |
| NY | | | X | 40 hours per week, non-farm | | |
| NC | | X | | | | |
| ND | | X | | | | |
| OH | | | X | | $160 per quarter | |
| OK | | | X | | | Employer payroll in preceding year of $10,000 per worker |
| OR | | X | | | | |
| PA | | X | | | | |
| RI | | X | | | | |
| SC | | | X | | | 4 employees per employer; payroll more than $3,000 in previous year |
| SD | | | X | 20 hours per week for more than 6 weeks in 13 weeks | | |
| TN | | X | | | | |
| TX | | X(d) | | | | |
| UT | | | X | 40 hours per week | | |
| VT | | X | | | | |
| VA | X | | | | | |
| WA | | | X | | | 2 employees; 40 hours per week each |
| WV | | X | | | | |
| WI | | X | | | | |
| WY | X | | | | | |
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(a) Domestic workers include household workers such as babysitters, housecleaners, gardeners, etc.; in some states excludes family members.
(b) Domestic workers are specifically excluded from the workers compensation system.
(c) Employers are permitted to provide workers compensation coverage voluntarily.
(d) Elective or optional.
(e) Coverage is voluntary for domestic workers but on an elective basis, i.e., an employer may elect, in writing, prior to an accident, not to be subject to the law. However, this requirement renders the law compulsory in practice. In New Jersey, homeowners insurance policies must contain provisions covering domestic workers.
Source: "Workers Compensation: Exposure, Coverages, Claims,"
ISBN #0-923240-12-8. Standard Publishing Corp., Boston, MA. All rights reserved; PCI. |
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BACKGROUND
The Workers Compensation Social Contract: The industrial expansion that took place in the United States during the 19th century was accompanied by a significant increase in workplace accidents. At that time, the only way injured workers could obtain compensation was to sue their employers for negligence. Proving negligence was a costly, time-consuming effort, and often the court ruled in favor of the employer. But by the early 1900s, a state-by-state pattern of legislative proposals designed to compensate injured workers had begun to emerge.
Wisconsin enacted the first permanent workers compensation insurance law in 1911 (New York had enacted a law a year earlier but it was found unconstitutional), and by 1920 all but eight states had enacted similar laws. By 1949 all states had a workers compensation system that provided compensation to workers hurt on the job, regardless of who was at fault. The costs of medical treatment and wage loss benefits were the responsibility of the employer which were paid through the workers compensation system. As part of the compromise that made the employer liable for work-related injury and disease costs regardless of fault, the employee gave up the right to sue the employer for injuries caused by the employer's negligence.
The scope of workers compensation coverage has broadened considerably since its early beginnings. In 1972, states amended their laws to meet performance standards recommended by the National Commission on State Workmen's Compensation Laws. Many states took action not only to expand benefits but also to make the coverage applicable to classifications of employees not previously covered. In addition, new federal programs were developed to protect workers not already covered by state workers compensation systems. For example, the Longshoremen's and Harbor Workers Compensation Act provides coverage for certain maritime employees and the Federal Employees' Compensation Act protects workers hired by the U.S. government.
However, compensation levels are not uniform. In some states benefits are still inadequate, while in others, they are overly generous. Some states have been slow to adopt the commission's guidelines and have still not embraced the entire package of 19 recommendations. Many states exempt employers with only a few workers (fewer than five, four or three, depending on the state) from mandatory coverage laws. A major benefits issue still to be resolved in some states is the imbalance between levels of compensation for various degrees of impairment; permanent partial disabilities tend to be overcompensated and permanent total disability undercompensated.
Employers can purchase workers compensation coverage from private insurance companies or state-run workers agencies, known as state funds. In 14 states, state funds compete with private insurers (competitive funds) and, in four states, the state is the sole provider of workers compensation insurance. West Virginia, which used to have a monopolistic state fund, is now privatizing its system. The market will be competitive starting in July 2008. (See list at the end of Recent Development section of this report.). State funds also function as the insurer of last resort for businesses that have difficulty getting coverage in the open market. The only state in which workers compensation coverage is truly optional is Texas, where about one third of the state’s employers are so-called nonsubscribers – 37 percent in 2006. Those that opt out of the system can be sued by employees for failure to provide a safe workplace. The nonsubscribers tend to be smaller companies. Only 23 percent of the state’s workers were employed by nonsubscribers in 2006.
Some businesses finance their own workplace injury benefits through a system known as self-insurance. Large organizations with many employees can often estimate the cost of routine types of injuries. Self-insurance along with large deductibles which are in effect self-insurance now account for more than one-third of traditional market premium. Put another way, workers compensation accounts for more than 40 percent of the alternative market, see also report on captives. Businesses that self-insure their workers compensation losses must prove that they are financially able to do so. They usually protect their assets by purchasing insurance coverage for catastrophic losses or losses in excess of a specific threshold.
Data on sources of workers compensation benefits presented in the 2007 November/December issue of Workers Compensation Policy Review, show the relative size of the different segments. In 2005, just over half of benefits (50.8 percent) were paid by private insurers, with the other half coming from state funds (19.4 percent) federal programs (5.9 percent) and self-insured employers (23.8 percent).
How the System Works: About nine out of 10 people in the nation’s workforce are protected by workers compensation insurance, which is compulsory for nearly all employees in all states with the exception of Texas. Laws vary by state for domestic workers, see chart.
Workers compensation systems are administered by the individual states, generally by commissions or boards whose responsibility it is to ensure compliance with the laws, investigate and decide disputed cases, and collect data. In most states employers are required to keep records of accidents. Accidents must be reported to the workers compensation board and to the company’s insurer within a specified number of days.
Workers compensation covers an injured worker’s medical care and attempts to cover his or her economic loss. This includes loss of earnings and the extra expenses associated with the injury. Injured workers receive all medically necessary and appropriate treatment from the first day of injury or illness and rehabilitation where the disability is severe. To rein in expenditures and improve cost effectiveness, many states have adopted cost control measures including treatment guidelines that spell out acceptable treatments and diagnostic tests for specific injuries, such as lower back injuries, and fee schedules that set maximum payment amounts to doctors for certain types of care.
Most claims are medical only but the lost time claims, those with both medical and lost income payments, though few, consume most resources. Claims are categorized according to the degree of impairment—partial or total disability—and whether the impairment is permanent or temporary. Cash benefits can include impairment benefits and, when the impairment causes a loss of income, disability or wage loss benefits.
Impairment can be defined in several ways. Payments may be based on a schedule or list of body parts covered and the benefits paid for a loss of that part. For injuries not on the schedule, benefit payments may be calculated according to the degree of impairment or loss of future or current earnings capacity, often using the American Medical Association’s definitions. Most states pay benefits for the duration of the injury. But some specify a maximum number of weeks, particularly for temporary disabilities. For workers with a total disability, the benefit amount is some percentage of the worker’s weekly wage (actual or state average). Cash benefits may not be paid until after a waiting period of several days.
Costs to Employers: Costs to employers include premiums, payments made under deductibles and the benefits and administrative costs incurred by employers that self-insure or fund their own benefit program. In the mid-1950s, private sector employers paid an average 0.5 percent of payroll for workers compensation. By 1970 this figure was 1 percent. Employer costs escalated steeply in the 1980s to 2.18 percent in 1990 and then declined. In 2001 they started to rise again. Estimates by John Burton in the Workers Compensation Policy Review, November/December 2007 put workers compensation costs as a percentage of payroll at 1.70 percent in 2005, down from 1.75 percent in 2004. However, there is a wide variation in costs among states and industries so that the highest rated (the inherent riskiest) groups could pay several hundred times that of the lowest (safest) as a percentage of payroll. Also taken into account is the firm’s own safety record.
Workers compensation premiums dropped considerably from 1994 to 1999, declining every year during that period by an average of more than 5 percent. The favorable workers compensation insurance environment during that time drew more insurers into the marketplace, pushing rates down. The discounting of premiums, in part as a result of high investment income at that time, together with intense competition, reduced premiums by 38.8 percent over the six-year period. Also contributing to the decline in premiums in the 1990s was growth in self-insurance and large deductible programs and, in some states, alternatives to workers compensation such as combined health and disability policies. Insurance, particularly commercial insurance, is a cyclical industry marked by hard and soft markets. Premiums rose again starting in 2000 as the economy expanded and the hard market in insurance, when demand outstrips supply, drove prices up. In 2007, with a generally soft market for most types of commercial insurance and a weakening economy, premiums began dropping again.
Claim Costs: As mentioned earlier, there are two components to workers compensation claims costs: payments for lost income, which is usually linked to a state’s average weekly wage, known as indemnity costs, and payments for medical care. Two decades ago, indemnity costs made up the greater part of total losses. In 1986, indemnity represented 55 percent of the total. By 1996, indemnity and medical had changed places with indemnity at 48 percent of losses. In 2007, as medical care costs continued to rise, indemnity accounted for only 41 percent.
Growth in workers compensation medical costs has been much steeper than in the health care industry as a whole. The annual average rate of increase in workers compensation medical care costs was 3.9 percent from 1991 to 1995. Since then the rate of increase has more than doubled and in most years was more than twice the rate of increase in the medical Consumer Price Index (CPI). NCCI Holdings suggests that much of the difference between the cost of a health care claim and a workers compensation claim is due to the volume, duration and mix of services used by injured workers and group health claimants. Over the five-year period, 2001-2005, in the states in which NCCI provides rate-making services, workers compensation medical costs rose an average of almost 10 percent while the medical care CPI rose 4.4 percent nationally over the same period.
But while the size of claims (dollar amount) has been climbing due to the increasing cost of medical treatment, the number of claims filed (frequency) has been dropping steadily as insurers and their policyholders focus on safety. The frequency of lost-time claims—where the employee was forced to take time off work because of the injury as opposed to just seeking treatment for the injury—dropped by 52.3 percent from 1991 to 2006. NCCI attributes recent declines in the frequency of accidents also to the use of robots, which reduce workers' exposure to hazardous activities; power-assisted devices that reduce physical stress, lighter and stronger materials and ergonomic design that reduce strains, and cordless tools, which reduce the incidence of tripping over cords. Frequency declines which first showed up among small employers are now evident also in large firms.
Insurance company financial results often report profitability in terms the combined ratio (the percentage of each premium dollar spent on claims and expenses). The combined ratio for workers compensation is reported in two different ways: by calendar year and by accident year. In 2007, the calendar year combined ratio started to deteriorate, moving to 99 from 93 in 2006. The accident year combined ratio also deteriorated from 84 in 2006, rising to 92 in 2007, according to NCCI. The accident year combined ratio hit a peak of 140 in 1999. Calendar year results reflect claim payments and changes in reserves for accidents that happened that year or earlier. Insurance companies have to set aside reserves for accidents that have happened but where claims have not been settled. Workers compensation claims may not be settled for many years, if the accident victim needs increasingly more treatment, for example. Accident year results, in that they include only losses from a specific single year, may present a better picture of the industry's performance at a given point in time.
Reducing Costs: Workers compensation system costs are rarely static. Reforms are implemented and then over time one or more elements in these multifaceted systems get out of balance. Soon employers and legislators complain that the cost of coverage is hurting the state’s economy by reducing its ability to compete with other states for new job-producing opportunities.
In the 1980s, with a view to increasing competition within the insurance industry to bring rates down, legislation was introduced in more than a dozen states to change the method of establishing rates, from administered pricing, where rating organizations recommended rates that included expenses and a margin for profit, to open competition. Now insurers base their rate filings on more of their own company's specific data, rather than using industrywide figures, in such areas as expenses, and profit and contingency allowances. Rating organizations still provide industrywide data on "losses"—the costs associated with work-related accidents, which help small companies that lack access to large amounts of data.
More recently, states have begun to disband Second Injury Funds. Set up mostly after World War II, these funds were designed to protect employers that hire disabled workers from having to bear the full cost of the first disability when an injury that further disabled the worker occurred in their workplace. Many believe that these funds are now unnecessary in that passage of the Americans with Disabilities Act has made the protection they afford to disabled workers redundant. The Act protects injured workers from discrimination by employers. At least ten states have repealed laws covering Second Injury Funds.
The aim of the workers compensation system is to help workers recover from work-related accidents and illnesses and return to the workplace. A fast return to work is desirable from the employer and insurer’s viewpoint, because this lowers claim costs, but the worker benefits too. Research shows that the faster the insurer receives notice of an injury and can initiate medical treatment, the faster the injured worker recuperates and returns to work and the less likely he or she is to seek out an attorney for help in dealing with a claim. Studies also suggest that most people want to return to productive employment as soon as possible. Electronic communication has enhanced procedures to speed up the "first notice of claim" filing process to the workers compensation administrative office.
In the past few years, many insurers have revamped the services they provide to their policyholders to speed up the time it takes injured workers to return to productive work. There are two important aspects to facilitating the return-to-work process. One involves getting the most effective medical care as soon as possible and reducing the emotional stress that may follow an accident. To help get medical treatment to the injured worker faster, some insurers help employers file promptly a "first notice of injury" with the state agency responsible for overseeing the workers compensation system, a step which triggers the claim process. The other is to encourage employers to improve communications, first about the workers compensation system in advance of accidents — a person who knows what to expect and who receives medical attention promptly will recuperate faster and is less likely to turn to an attorney for help — and second when injured workers are off work, so that they feel they are still part of the workplace team and are anxious to return. Insurers have also strengthened communications among all the parties involved in the case so that each knows how treatment is progressing.
Another aspect of the return-to-work process is successful reintegration into the workplace. Insurers help employers assess the injured worker's needs and capabilities and encourage them to let workers know, in advance of any injury, that they will try to modify work activities to accommodate those who are permanently disabled.
Long absences from work can have a lasting negative impact on a worker’s future employment opportunities and thus in their economic well-being. A study of injured workers in Wisconsin by the Workers Compensation Research Institute found that the duration of time off work and periods of subsequent unemployment are lower for injured workers who return to their pre-injury employer than for those who change employers.
Another factor pushing up costs in some states is the amount of attorney involvement. Workers compensation programs were originally intended to be "no-fault" systems and therefore litigation-free. Attorney fees are either set by law or subject to approval of the courts or regulator. Computations may be based on an hourly rate, a percentage of the total award, a specific percentage according to the level of the hearing on the case, or a sliding scale with percentages decreasing with the size of the award. Many states have caps on attorney fees.
Although attorney involvement boosts claim costs by 12 to 15 percent, because claimants must pay attorneys' fees there is generally no net gain in the actual benefits received. Overall, attorneys are involved in 5 to 10 percent of all workers compensation claims in most states—but as much as 20 percent in systems where the number of disputes is high—and roughly a third of claims where the worker was injured seriously. The involvement of an attorney does not necessarily indicate formal litigation proceedings. Sometimes, injured workers turn to attorneys to help them negotiate what they believe is a confusing and complex system. Increasingly, states are trying to make the system easier to understand and to use.
The workers compensation system plays a major role in improving workplace safety. An employer's workers compensation premium reflects the relative hazards to which workers are exposed and the employer's claim record. About one-half of states allow what is known as "schedule rating," a discount or rate credit for superior workplace safety programs. In addition, a majority of states now provide for optional medical deductibles in workers compensation insurance policies as a cost-saving measure and, in some states, allowable deductible amounts were raised. (Deductibles reduce premiums because they lower an insurer's administrative expenses, which, for small claims, make up a disproportionately large portion of the cost of settlement.) Deductibles also encourage greater safety-consciousness on the part of the employer who must pay the deductible amount.
In some states, insurers must provide accident prevention services to employers. In others employers are required by law to set up safety committees and other programs to deal with unsafe conditions in the workplace and assign specific responsibility for creating, monitoring or overseeing workplace safety to a governmental agency.
Some businesses are taking a more radical approach to bringing costs under control through coordination of workers compensation, health care and disability benefit plans. The integration of workers compensation and other employee benefit programs is a broad concept that ranges from a simple marketing approach that promises savings from using the same insurer for both coverages to programs that offer a managed care approach to the management of all types of disability, regardless of whether they are work-related.
Besides limiting overlapping programs and streamlining administration, proponents say such a change addresses the increasing difficulty of distinguishing between work- and nonwork-related injuries and illnesses, such as injuries due to repetitive motion and stress claims. It also improves productivity since nonwork-related disabilities are managed with the same focus of getting the employees back to work as work-related cases, and at the same time addresses the potential for reporting injuries that occur outside the workplace as work-related to reduce the employee's out-of-pocket costs. Workers compensation pays for all reasonable medical treatment without deductibles and co-payments, as opposed to health care, where the policyholder incurs some out-of-pocket costs.
Residual Markets: Residual markets, traditionally the market of last resort, are administered by NCCI in 29 jurisdictions. In some states, particularly where rates in the voluntary market are inadequate, the residual market provides coverage for a large portion of policyholders and, in 1993, represented about 26.5 percent of the total workers compensation market (excluding employers who are self-insured). Since that time, NCCI has taken steps to reduce the size of the residual market by creating financial disincentives to obtain coverage from it.
Terrorism Coverage: Since the terrorist attacks of September 11, 2001 workers compensation insurers have been taking a closer look at their exposures to catastrophes, both natural and man-made. According to a report by Risk Management Solutions, if the earthquake that shook San Francisco in 1906 were to happen today, it could cause as many as 78,000 injuries, 5,000 deaths and over $7 billion in workers compensation losses.
Workers compensation claims for terrorism could cost an insurer anywhere from $300,000 to $1 million per employee, depending on the state. As a result, firms with a concentration of employees in a single building in major metropolitan areas such as New York or near a “trophy building” are now considered high risk, a classification that used to apply only to people in dangerous jobs such as roofing. Faced with the possibility of a huge death toll costing millions of dollars and the threat of insolvency as a result, all but the largest insurers are limiting coverage. This is forcing some employers to raise their deductibles, in effect self-insuring part of the risk, and to deal with several insurers to reduce the potential maximum loss for each.
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KEY SOURCES OF ADDITIONAL INFORMATION
Issues Report, a yearly overview of the workers compensation system, National Council on Compensation Insurance.
"Property/Casualty Insurance Facts," Insurance Information Institute, annual publication.
"Analysis of Workers' Compensation Laws," U.S. Chamber of Commerce, annual publication.
Publications from the Workers Compensation Research Institute, Cambridge, MA. http://www.wcrinet.org
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