Who’s Really Paying for Workers Comp?

It was supposed to be a grand bargain to provide workers who were injured on the job with financial compensation for the injury while simultaneously protecting employers from negligence suits.

But more than 100 years after the first workers compensation insurance law was enacted, worker advocates argue the system has been rejiggered so much that employers are the only ones getting a bargain, and business groups say more reform is needed if they are to keep their costs manageable.

What all sides can agree on is that workers comp systems across the nation are undergoing unprecedented reform. In the past three decades, more than 33 states have adjusted their systems in an effort to corral spending. Because workers comp is regulated at the state level, companies doing business in more than one state especially need to stay on top of change. In the past two years, numerous states have adopted different approaches. Among them:

• Oklahoma has joined Texas in allowing employers to opt out of state-run workers comp. The Oklahoma program differs from the Texas program in several ways. The most notable: Oklahoma employers must continue to provide benefits similar to a workers compensation plan, while Texas employers are not required to provide coverage of any kind.
• Tennessee established an administrative system to settle workers comp claim disputes, removing the resolution process from trial courts. It also placed a higher burden on workers to prove their injuries are the result of a workplace incident.
•  Delaware adopted cost-control measures on pharmaceuticals and reduced payments allowed for medical and hospital fees.
•  Minnesota capped benefits for job development but also increased its cost-of-living adjustment for permanently disabled workers.
• Georgia adopted caps for medical benefits for non-catastrophic cases.
•  Florida reduced the amount doctors can charge for physician-dispensed medications.

The reform movement doesn’t necessarily mean more business for brokers, but it does mean more work. Coverage requirements vary by state, and brokers must ensure they find the appropriate coverage for their clients. According to the Insurance Information Institute, 20 states have established state funds that compete with private insurers for workers compensation premiums, and four states do not allow private competition with their state funds.

With so many states reforming their systems, brokers can play an increasingly important role helping clients manage workers compensation costs.

“It’s really the broker’s job to stay abreast of those trends, period,” says Pam Ferrandino, National Casualty Practice Leader at Willis North America. “It is less about selling the coverage versus helping our clients make decisions around managing their risk. The biggest change is a word that’s used today that we never used back then: an outcome-based approach.

“You can also start with your pre-loss. The most important way to finance a workers comp claim is not to have one. I think most employers are focused on preventing injuries, but when events do happen, it is getting the employee treated with the best level of care so that they can return them to work quickly. When we start hearing ‘outcomes-based approach,’ it’s helping a client make these decisions around getting their employees the best treatment.”

Debbie Berkowitz, a senior fellow at the National Employment Law Project, agrees.

“That’s really what I see the role of insurance companies and brokers as,” she says. “If they want companies to save money, the key is to prevent injuries, not to just continually reduce benefits and reduce the ability of workers to get comp, because that just shifts the cost to everybody else in society.”

According to the Occupational Safety and Health Administration, employers record about three million serious occupational injuries and illnesses a year on legally mandated logs. Of those, about half require at least a day away from work, a job transfer or a work restriction for recovery. About 4,500 workers are killed on the job annually, according to the Bureau of Labor Statistics.

“Benefits as a share of payroll are on the decline, and they’ve been declining for some time now,” says Ishita Sengupta, until recently the director of workers comp at the National Academy of Social Insurance. “At the same time, the costs to employers are increasing, so both of these actions are actually diverging.”

As employers try to figure out ways to cut costs, Sengupta says, workers comp, which she calls “an expensive form of insurance,” is often a casualty of budget cuts.

“It’d be difficult to pick a position here,” she says. “Both sides are suffering. Obviously the employers want to have effective workers compensation that is not that expensive to them or it becomes very difficult for them to cover workers.”

Sengupta also notes the aging American workforce, in which nearly 22% of the labor force is over 55. “You can’t expect to have a perfect worker,” she says. “They need more claims. They need more benefits. They need time to get back to work if they are injured. They are productive workers, but they need more time to get back to work.”

What’s Driving Costs?

Some cost increases can be attributed to the recovery of the U.S. economy since the recession that began in 2008. As the labor force grows, so does the number of covered employees and the number of on-the-job injuries. Employer costs are the first to increase as businesses pay more in premiums to cover the growing workforce. Benefits, however, increase more slowly because they don’t kick in until there is an injury.

Jerry Murphy, the executive vice president of AmWINS Brokerage of Texas, says there are additional drivers, such as the need to address opioid use for pain management. As in the healthcare debate, higher medical costs are also playing a significant role. In fact, he says, rapidly increasing medical costs now worry insurers more than the actual cost of compensating injured employees for their lost earning potential.

However, Ben Palmquist, the campaign manager at the National Economic & Social Rights Initiative, says workers are the ones who are most affected. “The workers compensation insurance industry and the employers who contract with them are trying to boost their profits—that is what their job is,” he says. “Unfortunately, the way they are able to do it is by minimizing how much they pay out, and the way you minimize what you pay out is by curtailing the benefits. If this were just some sort of trade-off, like a business transaction, that would be one thing. But the problem is that a worker’s fundamental right to get healthcare and a basic level of support they need to continue living is under impact.”

Cost Shifting

Reform critics say a major effect of the reforms has been to shift the burden of paying for workplace injuries from business to workers and society.

OSHA asserted in a 2015 report, “Adding Inequality to Injury: The Costs of Failing to Protect Workers on the Job,” workplace injury and illness costs are borne primarily by injured workers, their families and public safety-net programs such as Social Security, Medicare and Medicaid.

As a result, OSHA says, workers compensation payments cover only a small fraction (about 21%) of lost wages and medical costs of work injuries and illnesses; workers, their families and their private health insurance pay for nearly 63% of these costs, with taxpayers shouldering the remaining 16%.

A report from the Center for Economic and Policy Research makes similar findings. The number of workers receiving Social Security Disability Insurance (SSDI) in the United States has gone from 25 per thousand in 1990 to 59 per thousand in 2014, bringing the SSDI trust fund close to depletion.

“Most of the rise in people receiving DI benefits is explained by demographics, such as the aging of the workforce, rather than people trying to avoid work,” says Dean Baker, an author of the report and co-director of the center. “It seems an overlooked factor, though, has been a drop in the number of people getting workers compensation. As a result of tighter state eligibility requirements, workers who might have otherwise been getting workers compensation for work-related injuries are now turning to disability insurance.”

The report, “Rising Disability Payments: Are Cuts to Workers Compensation Part of the Story?” uses data from the National Council on Compensation Insurance, the National Academy of Social Insurance and the Social Security Administration to explore the relationship between workers compensation and SSDI. It suggests that more than one fifth of the rise in the percentage of workers receiving SSDI awards can be explained by cuts to workers compensation programs statewide.

Berkowitz agrees with the cost-shifting accusation but says the real bottom line is employers don’t do enough to prevent workplace injuries.

“Workers comp was a weak system to begin with because it’s not a federal system,” Berkowitz says. “It was set up as a state-by-state system. Workers comp never set up enough incentives for employers to prevent workplace injuries and illness to begin with. The bottom line with most workplace injuries is they are preventable. Companies can prevent this.

“People are really focused on income inequality, and workplace safety is part of that equation. When companies invest in workplace safety, workers don’t get injured. Once you get injured, it can really derail a whole family’s economy. It can set you back.”

Opt-Out Programs

Perhaps no part of workers compensation is as controversial as the growing “opt-out” movement. For decades, Texas stood alone as the only state that did not require private-sector employers to carry any sort of injury-benefit program. While most Texas employers have some such program, the state’s Department of Insurance says 5% of the Texas workforce—or about 470,000 workers—is not covered by any occupational injury program.

About one in three employers in Texas have opted out of the state-run system, deciding instead to run their own program. Oklahoma’s opt-out plan, adopted by lawmakers in 2013, allows employers to leave the state system as long as they maintain an injury-benefit plan that at least matches the state’s. Lawmakers in Tennessee and South Carolina are also expected to consider opt-out proposals soon.

Opt-out advocates say that leaving the system gives them more flexibility to address employee injuries and that reduced bureaucracy means claims are settled faster, which returns employees to work faster. Brokers with clients in Texas and Oklahoma say opting out can work for certain kinds of employers.

“They have to have interest and desire to be a part of the process,” Murphy says. “These employers are frustrated with not being a part of the process or being in the loop, or seeing action expedited once they have keen information on a particular claim situation. They feel frustration because their voice is not being heard.”
Opting out can be a reflection of a company’s culture.

“Is it economics?” Murphy asks. “Is it frustration over having to pay things that they don’t feel are fair and equitable? Is it a method for them to develop their network of care with local practitioners and groups to treat their employees? Is it a method of continuation of culture within the company?

“Walking away from a regimented system performed by others and now taking it into a system that I have influence over is another form of benefit. I am going to describe that to my workforce, and I’m going to be a party to their unfortunate injuries, and I’m going to work with all the vendors to make sure we get all the best services to bring that person back and whole. That’s a cultural influence I can have. In this day and time, culture of employers is big. It’s a big part of what they are hoping to have: fewer turnovers, satisfaction, best place to work in town—all those elements—and this is an avenue of presenting that.”

Darlene Freeman, a consultant for Great American Insurance Company, spent nearly 20 years developing and managing nonsubscriber programs for other major insurance carriers. “During my career I have encountered thousands of companies who have opted out of state-run programs,” she says. “The majority of these have experienced a large reduction in workplace injuries, due to safety training, and lower overall claim costs.”

Freeman co-founded Employer’s Comp Associates (ECA) in 1993. ECA partnered with Great American Insurance Company in 2009 to introduce a new program for Texas nonsubscribers. In 2012, Great American acquired the assets of ECA to form its ECA Division.

“The option is a good choice for employers who want to have more control of workplace injury claims,” Freeman says. “It provides statutory benefits for the employee as well as exclusive remedy protection for the employer. Advantages include more direct communication with the employee resulting in higher employee satisfaction, more employee accountability requiring injuries to be reported timely and treatment plans to be followed resulting in better medical management. The employer’s risk is minimal due to exclusive remedy.

“Employers who are not comfortable with assuming some of the risk, either with a self-insured retention or deductible, and who do not want to manage an employee benefit plan are not a good fit for the option.”

Mike Spaan, the president of InLight Risk Management, says Oklahoma’s opt-out system has enabled him to find more affordable coverage for clients.

“We do a lot in the healthcare industry—things like long-term care facilities, home healthcare, hospice, that type of organization,” he says. “We had been looking for different alternatives for a while on hard-to-place workers comp, so the option really provided us with some good alternatives for that kind of risk.”

Spaan says taking more control over the occupational-injury benefit plan requires commitment.

“It’s an employer who cares about their employees and wants to do the right thing, but they are willing to get involved in the process,” he says. “They don’t want to just buy an insurance policy to take care of everything. They want to get actively involved in educating the employees on safety, educating the employees on what the opt-out option means to them and how to report claims in a timely manner.”

Part of that commitment is a bigger emphasis on safety and accident prevention.

“They have regular safety meetings,” Spaan says. “They have in-services with the employees to educate them on different safety and loss control measures that can reduce injury in the workplace. They take an active role in making sure the employee gets quick medical attention right when the employee gets injured so that they can get on top of the injury and make sure the employee gets the proper medical care right away so that they can get them back to work as quickly as possible.”

Does opting out lower costs and improve outcomes? Spaan says it’s too soon to know about Oklahoma.

“Anything right now would be a guess,” he says. “We think it appears that claims are closing faster in the option than they are in workers comp. If we say that is half as good as the results in Texas, then there’s going to be significant savings, because there has been massive savings in Texas. It’s not going to be as much, but it should be comparable or fairly close, because in Texas there are a lot more litigated cases than there are going to be in Oklahoma, but the medical costs in Oklahoma are going to be higher than in Texas.

“If you’re just going to look at Oklahoma, rates have actually gone down in the last two years because of the new law. In the last two years the trend is definitely positive in Oklahoma. However, nationally, that’s not necessarily the case. In some states it has gone way up.”

Opt out is under increasing pressure from opposition groups that portray it as an excuse for employers to shirk responsibility. They point to cases where injured workers are forced to accept the findings of doctors selected by their employers or have their access to attorneys limited. Because of their concerns, 10 members of Congress have called on the Department of Labor to take a more aggressive oversight approach to ensure the rights of workers are being met by workers comp programs.

“We would like to see things move to the national level,” Palmquist says. “We’re pushing for universal, publicly financed healthcare and to have workers comp medical care become a part of that. But just moving things to the national level doesn’t guarantee better outcomes for workers. Part of what we are seeing in other states is a lack of accountability. When workers’ needs are not being met, there is no process for them to effectively bring that forward and have that remedied. Just moving things nationally wouldn’t guarantee that.”

In response, the National Conference of Insurance Legislators announced it will investigate costs and benefits of opt-out/opt-in approaches and weigh in as needed on calls for federal intervention.

Most legislators active in the national conference either chair or are members of the committees responsible for insurance legislation in their respective states. The organization is committed to protecting state insurance regulatory authority.

“Though NCOIL has taken no position on these unique programs, we’d be remiss if we didn’t look at the issue further—especially since there’s movement in other states to let employers opt out of state workers compensation requirements,” says North Dakota state senator Jerry Klein. “The growing federal interest in getting involved with state authority to oversee how injured employees are paid means that NCOIL must be ready to stand up for state consumer protections and regulations.”

Palmquist says workers compensation is not totally broken.

“Workers comp does actually serve some people well,” he says. “It’s not that the entire system is totally failing every single worker. Workers who have an acute injury and need quick care so they can get back to work—for a lot of people actually, that’s fine. The real problem is the system is inequitable in that the people who have the deepest needs and the longest-term needs, because they have chronic injuries or illnesses, are the most expensive to insure. So those are the folks who are being affected.”

Palmquist says the National Economic & Social Rights Initiative has identified what it says are seven destructive trends facing workers comp:

•  More workers’ health conditions excluded from coverage
•  Increased procedural barriers to workers’ claims
•  Reduced income support for disabled workers
• More employer control over workers’ medical treatment
• The lifting of a universal mandate that employers carry workers comp insurance
• Bans on workers suing insurers for dishonest and misleading practices
• Reduced access to injured workers’ attorneys.

“Workers are on the defensive,” Palmquist says. “We’re just not in a good place right now. A big part of what we are trying to do is make people realize there is a huge tragedy happening right here and we have to start paying attention.

“It takes a lot of organizing on the ground, but part of what it takes, too, is a fundamental shift in our values as a society. I don’t have any illusions about how hard these changes are, but I think people are fundamentally good and want to take care of each other.”