Workers Compensation
Workers compensation insurance covers the cost of medical care and rehabilita- tion 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 and in return receives workers compensation benefits regardless of who or what caused the accident, as long as it happened in the workplace as a result of and in the course of workplace activities.
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.
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 legisla- tive 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 unconsti- tutional), and by 1920 all but eight states had enacted similar laws. By 1949 all states had a workers compensation system that provided compensation to work- ers hurt on the job, regardless of who was at fault. The costs of medical treat- ment and wage loss benefits were the responsibility of the employer which were paid through the workers compensation system.
The scope of workers compensation coverage has broadened consider- ably 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.
However, compensation levels are not uniform. In some states benefits are still inadequate, while in others, they are overly generous. Some states were slow in adopting the National Commission’s guidelines and have still not embraced the entire package of 19 recommendations published in 1972. 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 compensa- tion for various degrees of impairment; permanent partial disabilities tend to be overcompensated and permanent total disability undercompensated.
Some coverage for workers compensation is provided by federal programs.
For example, the Longshoremen’s and Harbor Workers Compensation Act, passed in 1927 and substantially amended in 1984, provides coverage for certain maritime employees and the Federal Employees’ Compensation Act protects workers hired by the U.S. government.
Employers can purchase workers compensation coverage from private insur- ance 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. 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 nonsubscrib- ers. 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, but the percentage of larger companies opting out has been growing.
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.
About nine out of 10 people in the nation’s workforce are protected by workers compensation insurance.
How the System Works: 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 acci- dents. 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 medi- cally necessary and appropriate treatment from the first day of injury or illness and rehabilitation when 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 lost-time claims, those with both medi- cal 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 the 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 employ- ers 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 compensa- tion. By 1970 this figure was 1 percent. Employer costs escalated steeply in the 1980s and 1990s, reaching a record high in 1994 of 2.99 percent. Since then they have fluctuated. Estimates by John Burton in the Workers Compensa- tion Policy Review, January/February 2008 put workers compensation costs as a percentage of payroll in 2007 at 2.28, up from a 10-year low of 1.92 in 2001.
The NCCI estimates that in 2008 employers’ workers compensation insurance costs accounted for 1.7 percent of total compensation costs. 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 rated (safest) groups, as a percentage of payroll. Also taken into account is the firm’s own safety record.
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. Some employers and legislators com- plain 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 in order to bring down rates, legislation was introduced in more than a dozen states to change the method of establishing rates from administered pric- ing, 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.
The aim of the workers compensation system is to help workers recover from work-related accidents and illnesses and to return to the workplace. A fast return to work is desirable from the employer and insurer’s viewpoint, lowering claim costs for the insurer but benefiting the worker too.
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.
However today, attorneys are involved in 5 to 10 percent of all workers compensation claims in most states—but in as much as 20 percent in systems where the number of disputes is high and in roughly a third of claims where the worker was injured seriously.
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. The involvement of an attorney does not necessar- ily 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 work- place 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.
Workers Compensation Residual Markets: Residual markets, traditionally the market of last resort, are an important segment of the workers comp market. Workers comp residual plans are administered by the 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.
Terrorism Coverage: Since the terrorist attacks of September 11, 2001, work- ers compensation insurers have been taking a closer look at their exposures to catastrophes, both natural and man-made. According to a report by Risk Man- agement 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 metro- politan 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.
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
*Scheduled to be privatized by 2013.
**Compulsory for extra hazardous operations only. Employers with nonhazardous operations may insure with the state fund or opt to go without coverage.