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Workers compensation putting businesses in bind.

Insurance Commissioner's Proposed Reforms Could Resolve Problem of Rising Costs

SUTTON PRODUCTS INC., a growing millwork manufacturer in Bergman, north of Harrison, paid $34,000 for workers compensation coverage for its 60 employees in 1991.

A year later, that cost would have risen to $50,000, if there were an insurance company that would underwrite the coverage.

But none would.

So Sutton's workers compensation costs skyrocketed to $70,000 when the coverage was placed in Arkansas' assigned pool of insurers.

The sudden increase in costs forced Sutton to eliminate any raises for its workers. With a hiring freeze on, Sutton's employee level has dropped to 45 through attrition.

The problems facing Sutton Products are not unique.

One Carlisle truss manufacturer with eight employees has decided to move his business to Mississippi because, he says, workers compensation premiums were "killing" his business.

Another businessman who opened his own cabinet shop in 1984 recently received an adjustment on his workers compensation premium. He owed an additional $7,800 for his seven employees, money he admittedly didn't have.

He was faced with the predicament of laying off some workers or taking the illegal gamble of going without the coverage.

According to employers, the state Insurance Department and representatives at the Workers Compensation Commission, the rising cost of workers compensation insurance is a crisis that could dramatically affect most businesses in Arkansas.

The only companies exempt are those wealthy enough to pay from their own pockets when a worker is injured. That means covering potential medical costs of $1 million or more and potential lawsuits much higher than that.

"Workers compensation rates are very expensive for employers," says Lee Douglass, state insurance commissioner. "There was a 15 percent increase in rates in 1991 and an 18.5 percent increase in 1992."

Actually, Arkansas businesses got off lightly the past two years. Insurance companies had requested rate increases of 35 percent in 1991 and 42 percent in 1992, Douglass says.

"There were 229 insurers offering workers compensation coverage in 1984," Douglass says. "Today, there are 187 companies licensed in Arkansas, but only six or seven are actively underwriting workers comp."

Why the drop?

Douglass notes that "for every dollar insurance companies collect under workers compensation, they pay out $1.27 in benefits."

A legislative ad-hoc committee is studying a bill that Douglass has proposed to revamp Arkansas' workers compensation law, which was passed in 1948.

The intent of the original law was to help the employee and employer carry on after a major accident in the work place. The total cost of the accident would be borne by the employer. The employee is not required to make any partial payment for premiums or medical costs, as is common with health insurance.

No one who now wants to amend the original law is opposed to those basic points.

Similar to Oregon's Reforms

Some of the Douglass' proposed changes include controlling costs within a managed health care system such as an HMO or a PPO; requiring that injuries be supported by "objective and measurable physical or neurological findings"; denying recoveries for non-work related assaults or alcohol and drug related injuries, and establishing a workers compensation fraud and safety investigation unit.

Douglass has patterned his proposal after reforms in Oregon that resulted in a 32 percent drop in premiums in the past three years. Oregon had the highest frequency of workers comp claims of any state in 1984-87, according to the December issue of Reader's Digest.

Douglass and Allyn Tatum, a commissioner at the Workers Compensation Commission, believe other reasons for increased rates are the absence of a cap on medical costs and legal opinions in some workers compensation cases.

"Court decisions have changed the definitions of what is covered by workers comp," says Kenneth Camp, director of governmental affairs for the Arkansas State Chamber of Commerce. "Our current law says that we're providing an insurance for an injury that occurs on the job.

"The courts have, in effect through several cases, said that basically if you're employed and you get hurt, even if it isn't on the job, you're covered" under workers compensation.

Tatum describes one case where a worker off the job was involved in an automobile accident. He sued to collect money from the driver of the other car.

The worker testified that he had received injuries in the automobile accident. He won the case and received a claim from the other driver.

Then, Tatum says, he decided to file a workers compensation claim for the injuries. He testified that the injuries had been received on the job. But because of his earlier testimony that the injuries had been from the automobile accident, the Workers Compensation Commission denied his claim.

The worker appealed the case to the state Court of Appeals. The judge in the case, to the commissioners' surprise, decided in favor of the worker, saying he

was due funds under his workers compensation claim.

In his opinion, the judge said, "It is not, however, the commission's prerogative to refuse compensation to a claimant simply because he is untruthful."

Blown Out of Proportion

Jim Clark, secretary-treasurer of the AFL-CIO in Arkansas, believes that workers compensation problems in the state are blown out of proportion by employers and insurance companies.

"Both sides are interested in lowering costs as much as possible," Clark says. "The difference is we're not interested in lowering costs to the detriment of injured workers. The most recent attempt through the ad-hoc committee to change the law would literally gut the law, from the perspective of the injured worker."

Clark says some parts of Douglass' proposal would eliminate the right of a worker to claim benefits for "what now are perfectly legitimate injuries."

"So many things would be added to the language of the law that just the fact of having an injury on the job, unquestionably related to the job, would not be enough for benefits," Clark says.

The AFL-CIO, Clark says, believes that insurance companies' costs are increasing because they are misrepresenting where money is going.

"They have said they have paid out something like $1.29 for every dollar in premiums," Clark says. "At the same time, we have figures that show self-insureds in Arkansas are able to carry out the same responsibilities, complying with the same law, for 50 percent or 60 percent less than insurance companies claim it is costing them.

"That's because the profit motive is taken out. Just like the savings and loans in recent years, the insurance companies have invested in real estate. They are trying to recoup the losses on the backs of the employers, not only in Arkansas but in other states."

"Those are things that the insurance companies and those that are serving as their advocates -- namely the insurance commissioner and several people in the Legislature -- do not want to address.

"The Chamber of Commerce in Arkansas has a wide array of members. Some of those members are insurance companies. And even though the vast majority of their members would benefit from a close look at a broader self-insurance plan or even a state fund that competes against the insurance companies, they turn their heads from that possibility. That's because the special interests of a few of their members, the interests of the insurance companies, are at risk."

Clark says Louisiana, Texas, New Mexico and Oregon are using a state fund to compete against insurance companies.

Improved safety measures and the state fund are two reasons why Oregon's workers compensation rates have dropped in the past three years, Clark says.

But Clark feels that Douglass has patterned his proposal after some of the "most egregious parts, those most offensive to the worker" in the Oregon law.

Dozens of Complaints

Dave Harrington, director of the Arkansas Industrial Development Commission, says his agency receives "dozens and dozens of calls" from small businesses in the state complaining of the rising workers comp rates.

"Some of them said the increase in the workers comp premiums were more than they netted last year," Harrington says.

It isn't often when a company admits to the AIDC that the main reason Arkansas wasn't chosen for a plant site is workers comp costs.

But recently, Harrington says, his representatives laughed when they heard one business indicate it selected Texas over Arkansas for that reason.

"We said, 'That's stupid. Texas' costs are higher than ours,'" Harrington recalls. "They said, 'That's true, but in Texas we can take a risk and insure ourselves up to $250,000 per case and we can operate.'

"We said, 'But what if you have a death or a serious accident?' They said, 'We're rolling the dice. We can afford to take that risk. But we could not exist as a business in Arkansas because we're required to have the complete coverage.'"

Douglass isn't aware of any prosecution for workers comp in Arkansas.

"That's the whole point of a fraud unit," he says, "to set up a mechanism where cases could be investigated, put together and given to the local prosecutor to try."

Douglass and Tatum believe there have been instances of workers compensation fraud in Arkansas but, because of heavy workloads by prosecutors, none have ever been brought to trial.

"The vast majority of claims in Arkansas are legitimate," says Tatum, who notes that both employee and employer fraud is a problem nationally. "The vast majority of them are paid in the manner they are supposed to be and the worker goes back to work.

"The system is working in the vast majority of cases exactly like it is supposed to. It's the troublesome 20 percent or so that may result in more than 50 percent of the cost nationally."

Harrington recalls one workers compensation problem he encountered at the AIDC.

He hired a secretary about five years ago. A few days after she began work, she requested a plastic covering to allow her chair to move easily over the carpeting.

A few days later, she accidentally tripped over the plastic, fell and broke her pelvic bone.

"We were very sorry for her," Harrington says. "We took her food, sent her cards and kept the job open. We were really concerned. I was personally calling her and many in the office were talking to her. But she got to where she wouldn't talk to us. We eventually found out that her attorney had told her not to talk to us.

"Her intent was not to come back to work. Somebody had talked her into getting as much as she could out of it. We offered for her to return. We kept the job open for six months. We were more interested in her, her health, her future and her job than her attorney was. And I know that she got very little out of the thing."

Clark says workers compensation originally was a trade-out for the benefit that employees had before -- to sue their employers.

"That didn't prove workable, a lot of people thought," Clark says. "They thought that sure and prompt but yet minimal benefits would be better for everybody than the occasional $1 million or $2 million lawsuit. They took away the right to sue and now they are trying to take away everything they swapped us for."

'It's Got to Be Done'

The problem is not restricted to Arkansas. Many states are facing the same situation.

It will be difficult for Douglass' bill to pass because it requires a two-thirds vote of both the House and Senate. One legislator has been quoted as saying, "It would be hard to get a two-thirds majority to vote for the Ten Commandments."

But Tatum is confident the workers compensation law will be changed. It may not happen this year with Douglass' bill, but eventually a new law will pass.

"It will come; it's got to be done," Tatum says. "If we do not see some major reforms to control the costs, then the costs will continue to rise at a very rapid rate. It's not going to stay where it is.

"It will eventually get bad enough in this state that there will be reform. The question is how bad are we going to let it get before change takes place."

Some Proposed Changes to Workers Compensation Law

Proposals Emphasize Returning Rehabilitated Workers to Their Jobs

INSURANCE COMMISSIONER Lee Douglass proposes to make many significant changes to Arkansas' existing workers compensation law. Among the proposals:

* Restates specific purposes of the law to offer expanded rehabilitation opportunities, control medical costs within a managed health care system, overrule erroneous decisions of Corporation Commission and reviewing courts, and to emphasize the object of the law as returning rehabilitated workers to their jobs without litigation.

* Compensable injury must be supported by objective and measurable physical or neurological findings, and subjective, non-measurable statements of pain are inadmissible in evidence to prove any injury if unaccompanied by objective, substantive findings.

* Recoveries are denied for non-work related assaults, alcohol and drug related injuries and applied consent is given to test for the presence of drugs. Sole proprietors and partners are allowed to either "opt in" or "opt out" of coverage.

* A workers compensation fraud and safety investigation unit, under supervision of the Insurance Commissioner, will be created. It will be given subpoena powers relative to fraud, safety and embezzlement issues.

* Mental injury or illnesses will not be compensable unless caused and accompanied by physical injury. There is an exception for victims of crimes of violence. Mental illness or injury is limited to 26 weeks of disability benefits. The concept of "predominant cause" of injury is defined as being more than 50 percent of the cause; it limits compensation for conditions where compensable injury combines with pre-existing conditions, and it excludes compensation for worsened condition if a non-work related factor causes a worsened condition.

* The Workers Compensation Commission may assess a civil penalty of $1,000 against an employer for each day his employees are not insured. The commission also can apply for a court order enjoining an employer from conducting business until he obtains coverage.

* The Insurance Department may further regulate the content of workers compensation policies. It will require insurers to give 30 days notice of cancellation of insurance.

* Insurers must make available, at no extra cost, safety and health loss control consultative services for all employers.

* Employers must notify employees who have "substantial handicap" to employment and are unable to return to previous employment about the opportunity for vocational rehabilitation. An employer must pay for 60 weeks of the training with the object of finding "suitable employment" within 20 percent of the former wages. The employee who refuses vocational rehabilitation is not entitled to any compensation.

* The employer is responsible to provide "usual, customary and reasonable" medical services, including drugs, prosthetic devices, etc.

* Only usual, customary and reasonable medical service charges will be approved. A mandatory, statewide managed care system will be provided where health care providers must be certified by the Workers Compensation Commission before being eligible to participate.

* Records are required to be provided to the workers compensation fraud and safety investigation unit.

* A civil penalty of $500 a day will be assessed against an employer for failure to provide reports required by law. The injured employee must submit to medical exams from time to time and cooperate with rehabilitation programs. Exam and travel expense will be paid by the employer.

* In all contested cases, fees for the claimant's attorney will be allowed out of "extra" compensation awarded. No employee will be required to pay attorney fees from his award unless an explanation and basis of the awarding of fees is set out. Fees awarded on appeal are to be paid by the employee from the award given.
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Article Details
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Title Annotation:Industry Report; includes related article
Author:Smith, David (American novelist)
Publication:Arkansas Business
Date:Jan 4, 1993
Previous Article:State employs 52,000, tops in Arkansas.
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