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Solving the workers' compensation problem through coalitions.

Just how bad is the workers' compensation problem? A Tillinghast study found that nearly 70 percent of middle* to large-sized companies considered the workers' compensation system to be in disarray and a threat to the financial results of their companies. Approximately 40 percent of the respondents indicated that they look closely at workers' compensation laws in the states where they consider locating new operations. Many respondents stated that they believe that the system will collapse by the mid-1990s if effective legislative reforms are not immediately undertaken.

Despite this bleak assessment, reform efforts in states such as Oregon have demonstrated that the workers' compensation system can be improved. However, successful reform rests on the development of coalitions between labor and management. When coalitions are able to develop reform initiatives that balance the interests of all involved parties, these groups will support them and lobby hard for their passage.

Oregon was able to break a longstanding political logjam by bringing labor and management together and subordinating the goals of special interest groups. While this subordination has in fact engendered some animosity from certain quarters, the Oregon system is nevertheless working and has moved away from the brink of collapse.

For nearly 60 years, insurers were able to make a profit from the workers' compensation line. Then, around 1971, the combined ratio of claim costs and expense to premiums written for workers' compensation insurers began to rise to 100 and higher, with 100 representing $1 of costs for every $1 of premium. This meant that more money was being paid out in benefits, legal fees and general administrative expenses than was collected in premium. Since that time, the combined ratio has steadily worsened. For example, whereas the combined ratio was 98.0 in 1969, it was 112.5 in 1983 and 123.0 in 1991.

Each year since 1983, the workers' compensation combined ratio has exceeded 115 and has averaged near 120 for the last several years. These ratios are particularly significant in that the workers' compensation line represents 14 percent of total casualty writings for the industry, but equals 26 percent of total commercial insurance underwriting losses. Since 1984, the industry has lost over $7 billion in surplus and is estimated to need an additional $15 billion to cover current premiums. In fact, the industry has not seen an underwriting gain in this line since 1970. Meanwhile, employers have seen premium increases in the double-digits for most of the last five years. The 1991 total cost of workers' compensation to employers was at $62 billion, up $7 billion (12.5 percent) from 1990.

While it is true that these losses are somewhat offset by investment returns, insurers are increasingly refusing to write workers' compensation coverage in states where it is unprofitable. In some cases, insurers are closing their doors completely in states that require them to pull out of all lines of business if they discontinue one line. This has left many employers in distress as they find coverage increasingly expensive and difficult to acquire.


There are numerous contributing causes to the workers' compensation problem. First, litigation has become more prevalent, affecting issues ranging from the criteria that constitute a compensable accident to the acceptability of alternative medical treatments. In fact, lawyers specializing in workers' compensation litigation have become a major sub-industry within the legal profession. In recent years, their intervention in clearly non-compensable cases has often led to more generous awards and more liberal interpretations of prevailing laws. Generally, attorney involvement has been fueled by the growing animosity between labor and management, which is a partial outgrowth 01 the restructuring and downsizing 01 corporate America. Unfortunately this increase in intervention has helped shift the emphasis from physical recovery of injury to financial awards.

A second cause of the workers' compensation dilemma is the steady rise in benefit levels. In recent years, these levels have stayed well ahead of premium rates. In some cases, the legislative bodies approving rate increases have ignored the tax-free nature of wage replacement benefits, thus enabling injured workers to take home more total pay than they received while working. These increases are caused by the generosity of employers who increase replacement wages so they are equivalent to the workers' regular gross earnings.

A third element of the problem is the routine double digit increases in the cost of medical care. In many states, this increase outpaces even the general medical care cost spiral. This has occurred because employees have been attracted by the typical statutory requirement of workers' compensation to cover 100 percent of related medical costs, thus shifting costs from general health care to the workers' compensation system. Additionally, there has been a growing tendency for medical professionals to practice defensive medicine in order to protect themselves from malpractice actions. In some cases, the motive of these practitioners is suspect - particularly when they own and operate in-house therapy and rehabilitation facilities to which they refer patients for additional treatment.

Finally, there is an increasing tendency for Americans to blame their employers for their non-job-related problems such as stress. In many cases, this has led to exaggerated or outright fraudulent claims. Experts estimate that the cost of these activities ranges anywhere from 10 percent to 20 percent of all claim costs.


Since the workers' compensation problem has so many components, it should not be surprising that there have been just as many, if not more, proposed solutions. Some of theseproposals have been limited to risk financing alternatives that reduce the cost pressure on employers and insurers. These responses include: employers opting for assigned risk pools, where premiums can be less than the voluntary market; employers opting to self-insure, thus avoiding the assumption of assigned risk pool assessments, which are typically distributed proportionally to insurers underwriting in each state; and the use of high deductible plans and captives, especially in states where insurers refuse to provide coverage.

Nevertheless, problems with the workers' compensation system continue unabated.

Other responses include various reform proposals promulgated by employers and/or insurers in an attempt to control particular types of costs. One area that continues to receive the most attention is medical cost control. Traditionally, medical cost control has entailed the use of physical and vocational rehabilitation, general medical case management and the use of employer-approved physicians in the limited number of states that permit such controls.

Today, medical cost control efforts in workers' compensation mirror those on the health care side, particularly through the nearly evangelical attempts to implement managed care techniques. These techniques induclude the use of preferred provider organizations or networks, fee schedules, medical service utilization review and service provider bill audits.

Unfortunately, few states allow employers to use these techniques for workers' compensation, despite their proven ability to reduce costs. As a result, their utilization in workers' compensation has achieved only marginal success compared to their use in general health care.

Employers and insurers have also responded by focusing more resources on cases of suspected fraud and claim manipulation. With the help of surveillance equipment, private investigators can identify socalled injured workers who engage in activities that their alleged injury would prevent them from performing - all while the worker remains off the job and collects benefits. Unfortunately, the typical view of the industrial commissions charged with settling claim-related disputes is to side with the employee when there is even the slightest doubt about the legitimacy of the evidence. And even when surveillance techniques are used successfully to terminate benefits, prevailing statutes often prevent employers from recouping the benefits they already paid out to the fraudulent worker.

Besides the remedies mentioned above, two other responses are worth investigating. First, a more enlightened approach to employer-employee relations suggests that through education, employers can placate employee fears about the consequences of workplace injuries. Failing to do so promotes what one researcher labels "learned helplessness." Essentially, this theory claims that when employees are injured, they regard their life situation as being beyond their control. This attitude is allegedly born out of the claimant's fears and frustrations over how the occupational injury will affect his or her life.

Finally, the developing concept of 24-hour coverage represents an attempt to create a coordinated approach to health care in both service provision and payment by making no distinction between on- and off-the-job medical conditions. Wellconstructed 24-hour programs could offer advantages such as the elimination of litigation over eligibility of benefits, the introduction of economies of scale through the combination of administrative delivery systems, and the use of managed care techniques for workers' injuries.

Unfortunately, the limited attempts made by states such as New York and Florida to implement 24hour plans have met with confusion, frustration and opposition. Some of the significant legislative impediments include: the possibility that the social, economic and legal difficulties associated with enacting 24-hour plans may outweigh the projected benefits; the high degree of uncertainty in estimated cost savings; the lack of uniformity in the proposals put forth to date; and the conflicting objectives of the two systems (i.e., more selective use of medical services vs. expedient recovery for early return to work). Other obstades to the use of 24-hour plans indude: the possibility that employers will lose the incentive to improve workplace safety; the current incongruity of benefit levels in the two systems since, by law, workers' compensation covers 100 percent of related costs; the elimination of employer protection from actions in tort; the regulatory conflict with

Employee Retirement Income

Security Act; and the turf conflicts that would likely occur between the different corporate departments that administer each system.


Although individual states have undertaken a multitude of reform efforts over the last 10 years, the workers' compensation problem continues to worsen. Few states have succeeded in addressing even a minority of the problems affecting their particular jurisdiction. Most efforts have been piecemeal, and few h. ave met their original objectives.

One case in point comes from a recent study of the 1979 Florida reform efforts, which attempted in part to control the cost and frequency of attorney involvement in workers' compensation claims in that state. While the study cites some evidence of initial success, these gains have since evaporated. The study demonstrates that workers' attorneys, after adapting themselves to the new rules, had within seven years of the reforms once again emerged as major players in the system. And although Florida has since instituted additional and more comprehensive reforms, especially related to the use of a 24-hour coverage concept, these attempts remain mired in legislative ambiguity and administrative confusion.

However, the comprehensive reforms implemented by Oregon in 1987 and 1990 are worth special consideration because of their unequivocally successful results. These achievements include a consistent three-year decline in premiums of 12.1 percent in 1991, 11 percent in 1992 and a projected 11.4 percent in 1993. Once the state with the eighth-highest premiums in the country, Oregon now ranks twenty-second. Oregon's former governor Nell Goldschmidt attributed these results to the reform efforts, which have decreased the frequency of injury and illnesses, placed a new focus on employer safety and its enforcement, and made additional state consultative resources available to employers to help them identify and solve their accident-related problems. Since the reforms have been enacted, premiums have steadily decreased, benefit levels have actually doubled and non-employment-related claims have been largely eliminated. And, after being a leader in fatalities among all states, Oregon is now at an all-time low in this category.

The key measures of the Oregon reform effort entail: a significant refinement of the legal definition of what constitutes a compensable accident or illness; requirements that injuries are compensated only when supported by clearly objective medical evidence; limitations on the extent to which pre-existing conditions and subsequent injuries can be considered to contribute to a claim; a narrower definition of what constitutes an attending physician by limiting chiropractic involvement and eliminating the acceptability of most palliative care, such as massage and ultrasound therapy; and a significant emphasis on the use of comprehensive and managed care techniques, which can be required when providers are state-certified. The Oregon reforms also require: .disputing parties to use mediators before receiving a court hearing; the use of safety committees by employers with 10 or more employees; a 10 percent limit on legal fee reimbursement; and the use of medical peer reviews to maintain service quality standards.

Since medical care constitutes between 40 percent and 55 percent of total workers' compensation expenses system-wide, the key elements of the Oregon approach to managed care are worth a closer examination. These elements represent the significant components of the provider contracts with the State Accident and Injury Fund (SAIF), which is considered a model for other insurers and self-insurers. They include required treatment standards for specific injury types (consistent with those used in general health care), standard billing procedures, exclusion of unethical providers, physician accountability for medical case management and prospective physician screening.


Unlike other state efforts, Oregon's has proven that workers' compensation reform can result in cost reductions, better system controls and an improvement in the provision of benefits to injured employees. Oregon's achievements are no fluke. In fact, the key to the state's success lies in the establishment of a coalition between labor and management - the two parties the workers' compensation system was originally created to serve.

This coalition, known as the Mahonia Hall group, was charged with developing reform recommendations for consideration by the governor, which would then be voted on by the state legislature. Although special interest groups such as lawyers, doctors and insurers were invited to present their views and suggestions, the right to make final recommendations was vested in the coalition task force.

Through their meetings, the coalition developed a clear goal - that the purpose of the workers' compensation system should serve the needs of employers and workers, and not special interest groups. In the end, there was a clear philosophical shift from encouraging workers to stay off the job to encouraging their return to work. Interestingly, other states have purposely left labor representatives out of the process; this has forced them to defend aggressive attempts to overturn legislative changes that otherwise would have been at least somewhat effective.

Recent efforts in Minnesota and Wisconsin have met with similar, although not as highly touted, success. When these three states' efforts are studied collectively, three common elements of the reform process emerge. First, early coalition building between labor and management representatives ensures the inclusion of the two key constituents impacted by the system. In this process, labor and management must be equal players in the review, analysis and recommendation phases of the reform effort.

Secondly, specific measures must be developed that directly impact the key cost drivers in each state's workers' compensation system - namely, litigation and medical care. This requires implementing methods that have proven successful in other states, as well as the avoidance of token changes in order to appease special interests. Failure to effectively address these two issues will ensure defeat of the best intentioned reform efforts. Finally, it is essential that states continuously monitor and regularly revise the reform process and the legislation that comes out of it, since even the best efforts may need periodic modification.


While using Oregon's experience as a model for effective reform, governors should help develop similar coalitions in their own states before the workers' compensation system collapses and becomes nationalized. Peter Barth, professor of economics at the University of Connecticut, recently remarked that although state-by-state reform is cumbersome, it will ultimately generate better long-run payoffs than any attempt at national reform. One need only look at the problems inherent in the U.S. Longshore and Harbor Workers Act to understand why a federal solution will only exacerbate the problem.

There are, of course, many business organizations with vested interests in this issue, and they must play a role in the reform discussion. However, this role must be limited to the presentation of viewpoints and ideas, and not decision making or the use of overt influence on legislatures. Governors should target the three groups that are the most instrumental in supporting effective change: the National Conference of State Legislators, since they will be the ultimate decision makers; the Independent Association of Industrial Accident Boards, who must implement and enforce the modified system that emerges from reform; and the National Association of Insurance Commissioners, whose primary constituencies are the labor and management representatives central to the reform process.

As the success of the Oregon initiative becomes more evident, most other interest groups will see the wisdom of its approach and will be unable to ignore the long-term benefits it has achieved for workers' compensation. Then, perhaps workers' compensation can be returned to its original purpose - a no-fault system that controls the cost of worker injury and illness while providing the necessary quality medical care and other services that return the worker to productive employment at the earliest reasonable time.
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Title Annotation:includes article about history of workers' compensation
Author:Mandel, Christopher E.
Publication:Risk Management
Date:Apr 1, 1993
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