Worker's compensation 101: a primer for the physician executive.

Workers' Compensation (WC) laws are designed to ensure that employees who are injured or disabled on the job are provided with monetary awards. These include medical care, rehabilitative services and income from lost wages.

In addition, most WC laws provide benefits for dependents of those workers who are killed because of work-related accidents, and limit both the amount of recovery from an employer and liability of co-workers in most work-related accidents.

The social policy behind the WC system is to replace the tort system with a more predictable and efficient compensation scheme. Similar to birth injury funds, recovery schedules allow for predictability from both an employee and employer perspective.

When first enacted, WC legislation was applauded by both employers and labor. More recently, however, the WC systems have become a corporate albatross with premiums increasing 50 percent in the last three years. Premiums currently account for .67 cents of every dollar spent on casualty insurance and show no signs of stabilizing. (1)

History

Prior to WC legislation, injured employees had to go to court and seek damages from their employers for work-related injuries. Employees brought traditional tort actions against their employers in courts of law.

As such, employees bore the burden of convincing a jury by a preponderance of the evidence that the employer had a duty to the employee, breached the duty with ensuing harm, and that there was a proximate cause between the breach and the harm. Needless to say, injured workers faced a lengthy and uphill battle for recovery. Employers, meanwhile, faced significant litigation challenges and expense.

In 1911, the first state WC laws were passed. They resulted from arduous negotiations between labor and employers. Injured workers gave up their constitutional right to seek redress in courts for fast and efficient wage-loss replacement, reasonable and necessary medical care, and, when complete medical cure was not possible, disability awards to compensate for lost future earnings.

Employers no longer faced protracted litigation with unpredictable outcomes. WC benefits were made available regardless of fault. The only requirement was that the injury occurred while on the job. Included were injuries caused by someone other than the employer such as a visitor, outside contractor or a defective product.

Statutory basis

It is important to keep in mind that all WC laws are creatures of state legislatures. As such, they are constantly changing and subject to intense lobbying by labor, industry, and providers. Each state is distinct in terms of coverage, exemptions and benefits. There are, in essence, 51 separate systems in the United States (plus additional systems in Puerto Rico, the Virgin Islands, and one for federal employees.)

Regulations are promulgated by the agencies charged with administering the programs. These regulations govern the operation of the individual programs. In addition, a large body of case law has developed that is controlling in the individual jurisdictions.

In addition to state statutes, federal statues also govern WC programs. The Federal Employees' Compensation Act (FECA) provides WC for non-military federal employees. Many of its provisions are typical of most state WC laws. Awards are limited to "disability or death" sustained while in the performance of the employee's duties due to injury or disease, but not caused willfully by the employee or by intoxication.

The act covers medical expenses due to the disability and may require the employee to undergo rehabilitation and/or job retraining. A disabled employee receives two thirds of his normal monthly salary during his disability and may receive more for permanent physical injuries, or if he has dependents. The act also provides for compensation for the survivors of an employee who is killed. (2)

* Similar to FECA, the Federal Employment Liability Act (FELA) imposes liability on railroads engaged in interstate commerce. (3)

* The Merchant Marine Act (the Jones Act) provides seamen with the same protection from employer negligence as FELA provides railroad workers. (4)

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* In addition, Congress enacted the Longshore and Harbor Workers' Compensation Act (LHWCA) to provide workers' compensation to specified employees of private maritime employers.

* The Black Lung Benefits Act provides for workers' compensation for miners suffering from black lung. It requires liable mine operators to pay disability payments and establishes a fund administered by the Secretary of Labor to provide disability payments to miners when the mine operator is unknown or unable to pay. (5)

* The Energy Employees Occupational Illness Compensation Program Act provides benefits to employees and qualified survivors of the Department of Energy and its contractors who developed radiation-related cancer, chronic beryllium disease, or chronic silicosis. Monetary and medical care compensation is only available to people and their survivors who worked or were exposed at certain facilities during specific time periods. (6)

The Office of Workers' Compensation Programs is responsible for adjudicating and administering claims for the above legislation.

Financing

Depending on the state, WC laws can be either compulsory or elective. Under elective laws, an employer may choose to accept or reject the act. If it is rejected, the employer loses certain key defenses if a worker is injured on the job.

Coverage is elective in New Jersey and Texas. Therefore, most states require employers to accept its provisions and provide the specified benefits. Most WC laws require minors to be covered regardless of whether they are legally employed. States vary on whether independent contractors are included as well as how independent contractors are defined.

While virtually all employers are required to participate in these systems, they have little control over the benefits. Unlike health insurance, workers' compensation coverage, benefits and dispute resolution procedures are all fixed by statute.

In most states, employers purchase insurance for their employees from a workers' compensation insurance company. Several states operate a mandatory insurance pool fund to reduce costs and cover assigned high-risk employers. In some states, larger employers who are clearly solvent are allowed to self-insure while smaller companies are not required to carry workers' compensation insurance at all.

When a worker is injured, his or her claim is filed with the insurance company. Medical and disability benefits are paid according to a state-approved formula.

Coverage

Coverage varies by state. However, in most states the initial medical expenses are usually completely covered. Ongoing therapy is frequently covered until a determination of maximum medical improvement is made. Additionally, vocational rehabilitation services must be made available in suitable cases.

The disability benefit payments are typically determined in two different ways. The most common type is termed scheduled payments. In this system, common occupational injuries (such as loss of hand, foot, arm, sight or hearing, etc.) are listed on a schedule. The schedule specifies the payment amount and period over which the benefit is paid.

In the second method, non-scheduled injuries are rated on a percent of total disability scale. A corresponding percentage of the maximum award amount is paid as compensation. Compensation for scheduled injuries is usually a proportion of the maximum payment amount and payment period allowed for non-scheduled injuries.

In some states the two methods are blended together. In other states there are no scheduled injuries.

Limitations

Most workers are eligible for WC coverage, but every state excludes some workers. Exclusions often include business owners, independent contractors, casual workers, domestic employees in private homes, farm workers, maritime workers, railroad employees and unpaid volunteers.

In addition, all states exclude certain types of injuries. Most often, injuries caused as a result of an employee being intoxicated or using illegal drugs are not covered by WC. Coverage may also be denied in situations involving self-inflicted injuries (including those caused by a person who starts a fight), injuries suffered while a worker was committing a serious crime, injuries suffered while an employee was not on the job, and injuries suffered when an employee's conduct violated company policy.

Under most state WC laws, injured employees are not entitled to the entire amount of their regular salary while off work due to a work-related accident. Income benefits while temporarily disabled and off work are generally computed at two thirds of the employee's gross average weekly wage. However, the state laws generally set a maximum weekly wage that is used in computing income benefits. The maximum wage set by state law is usually dependent on the date of injury or discovery of illness.

Current landscape

Employers and labor alike have characterized the WC system as being in a state of crisis and in need of major reform. California, having one of the largest WC systems, gives us an example of the magnitude of the problem.

Employers in California paid $25 billion for workers' compensation coverage in 2004, up from S9 billion in 1995. (1) California accounts for 14 percent of the U.S. economy but 26 percent of the country's workers' compensation premiums. Although reports of all workplace injuries and diseases have declined, California reports claims with permanent partial disability awards at the rate of 1,221 per 100,000 employees, compared with the national average of 434 per 100,000. (7)

Workers' compensation payments to chiropractors are 148 percent higher in California than in the median state.

And although the workers' compensation system is supposed to reduce litigation, 30 percent of California's open and closed indemnity claims from 1992 to 1999 ended in litigation. This compares with 14 percent nationally. (8)

California is not the only state feeling the effects of rising WC costs. Texas has the nation's highest average total cost per claim and in New York, Tennessee, and Florida costs are increasing at an accelerated pace.

The cost drivers

Inappropriate claims are a major component of the workers' compensation problem. As many as 25 percent of all filings may have some element of impropriety. (9)

There are many possible causes, including misunderstandings, honest mistakes, cost shifting from non-occupational health care, employee resentment, unscrupulous service providers and outright fraud. The National Insurance Crime Bureau estimates that workers' compensation fraud alone costs insurers $6 billion each year. One insurance carrier estimates it at over $30 billion per year. (10)

Another cost driver results from irrational incentives inherent in WC schemes. The longer an employee is out of work, the more likely he or she is to get a cash award. Claimants with injuries that should keep them out of the workplace for two or three days may stretch their absence to two or three weeks. Viewed as an entitlement, many don't regard this behavior as fraudulent.

In addition, every state has a waiting period of three to seven days before qualifying for wage-replacement benefits. By extending an otherwise limited absence, an employee becomes entitled to indemnification for lost wages on a retroactive basis to the first day of the claim. For many lower-paid workers, the "tax free" wage replacement represents an acceptable lifestyle.

Finally, health care providers are often described as contributors to escalating costs. Well-organized lobbying efforts have resulted in the growing role of health care providers in shaping public policy. This may contribute to escalating costs as reflected by both an increased frequency and payment per claim.

Workers' compensation was initially a two-sided compact between employers and employees. Now with providers entering the compact, costs of induced demand as well as fraud and abuse are additional considerations.

Employer responses

All employers are experiencing the effects of rising WC costs. The impact is greatest, however, on companies that buy full coverage. Large employers typically retain some portion of their workers' compensation risk through high deductibles and other financing mechanisms.

More recently, with rising premium prices, mid-sized companies are also retaining risk through self-insurance, captives and reinsurance. These arrangements are not a solution for all as they have the potential of placing companies with marginal reserves in serious financial distress.

In addition to alternative financing schemes, employers are utilizing a variety of strategies to reduce the incidence of inappropriate claims. They may be divided into pre-loss and post-loss initiatives.

It is well known that over a quarter of all workplace injuries occur in new employees. Injury prevention, therefore, begins with the hiring process. The Americans with Disabilities Act forbids discrimination in the hiring process against any qualified individual with either a physical or mental disability. It does not, however, require that an employee be placed in a job when he or she cannot perform the essential functions of the job even with reasonable accommodation.

Objective post-offer, pre-hire screening requires that the job must be accurately assessed (lifting a specified weight, bending, twisting, and walking) and also requires that the employee's own physical capabilities be carefully evaluated. Screening also gives the employer a baseline for the employee's capabilities at the time of hiring. Since employers are responsible only for injuries that arise out of employment and in the course of employment, preexisting injuries or those resulting from the natural course of aging are excluded.

Post-loss initiatives most commonly involve early-return-to-work (ERTW) programs. Claimants who extend their absences often have more than one motivation. In addition to the possibility of a cash award, they may feel disaffection from the workplace and antipathy to their supervisor or company in general.

ERTW programs are typically managed by a member of the human resources staff, a case manager, a nurse, or some other person who is external to the actual work unit. Companies that have the lowest cost of workers' compensation risk give ERTW responsibilities directly to the employee's operational manager or supervisor. This is the person who has the greatest influence on the workplace environment and on the individual employee.

Needless to say, when supervisors treat injured employees with dignity and respect at the time of injury and throughout the recovery process, the duration of lost work time shrinks and workers' compensation costs decreases. While an ERTW program does not take the place of a safety program, it is likely to produce far more rapid behavioral changes than a safety program can achieve alone.

Legislative reform

Most recently, states have attempted to control escalating costs with a combination of legislative and regulatory reforms. State legislative reform has several common features. They include revising definitions of compensated injuries and occupational diseases and increasing the degree of proof for conditions susceptible to legal manipulation.

In addition, reform initiatives involve controls on the number of medical visits per claim, particularly to physical therapists and chiropractors. California's Senate Bill 899 of 2004 is considered a model for other states. It includes temporary disability caps, return to work initiatives, revision of schedules, apportionment, first day medical treatment and strengthening of utilization guidelines and provider networks. (11) Preliminary data look promising as reflected by a stabilization of employer premiums.

It has been close to 100 years since the first WC laws were passed in the states. The laudable goals of the system to rapidly and fairly compensate workers injured on the job in exchange for shutting the doors to courtroom remain as strong today as in the past.

Reforms, however, have not kept up with the landscape of today's workforce. Costs, as reflected by employer premiums, have skyrocketed. At the current average rate of growth, the employer's total costs for workers' compensation will exceed the employer's costs for social security in only six years.

Physician executives in all sectors of the health care industry must keep abreast of WC issues as they will continue to be a part of state and national health care reform initiatives.

Christopher Spevak, MD, MPH, MBA, JD, is a physician attorney practicing in Washington, D.C. He is the physician director of government relations of the Mid-Atlantic Permanente Medical Group, and a clinical associate professor at Georgetown University Medical Center. He may be contacted at 202-210-1989 or [e-mail].

Disclaimer

This series of articles is designed to educate physician executives on legal principals necessary to lead health care organizations This article contains the advice, opinions, statements and views of the author and does not necessarily represent the advice, opinions, statements or views of Georgetown University Medical Center, the Mid-Atlantic Permanente Medical Group, PA or its physicians. The content of this article is provided solely for informational purposes: it is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax, career and/or other professional advisors.

References

1. California Commission on Health and Safety and Workers Compensation Fact Sheet. http://www.dir.ca.gov/CHSWC/WC_factSheets/WorkersCompFSCost.pdf Accessed Sept. 25, 2006.

2. 5 USC [section]1801 (2006).

3. 45 USC [section]2 (2005).

4. 46 USC. [section]688 (2005).

5. 33 USC [section]918 (2005).

6. 42 USC [section]84 (2005).

7. Workers Compensation Research Institute http://www.wcrinet.org/about.html Accessed Sept. 25, 2006.

8. New California Law Limits Workers' Compensation Visits to Chiropractors. Chirobase. http://www.chirobase.org/15News/wcri.html Accessed Sept. 25, 2006.

9. New York Office of the Inspector General. Workers Compensation Board http://www.wcb.state.ny.us/content/main/fraud/fraudbrochure.htm Accessed Sept. 25, 2006.

10. Labor Research Association Workers Compensation Fraud: The Real Story. Executive Summary, June, 1998. http://www.laborresearch.org/ind_temps/work_comp_fraud._rpt.html Accessed Sept. 25, 2006.

11. Workers Compensation Reform. What You Need to Know. http://www.aon.com/us/busi/pdf/worker_comp_reform/sb_899_what_you_need_to_know.pdf Accessed Sept. 25, 2006.

By Christopher Spevak, MD, MBA, MPH, JD

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