Achieving Cost Reductions through Workers Compensation Reform
September 2002
Mick McGavin provides a list of issues that
employers should consider when there is an opportunity to reform their state's
workers compensation system.
by Martin
McGavin
Workers compensation systems are very dynamic and can change significantly
from year to year. In some instances the benefits paid to injured workers become
inadequate over time because maximum benefit rates have not kept pace with inflation
or eligibility rules are stretched to unanticipated limits by court decisions.
A workers compensation system can reach the point where it is totally out of
balance because it provides either inadequate benefits to injured employees
or unbearable costs for employers who must pay the bill. In some instances,
workers compensation systems produce both inadequate benefits and extremely
high costs at the same time.
Each year, a number of states review their workers compensation legislation
and regulations and make an attempt to restore balance to the system. The process
is commonly referred to as "reform." Frequently the goal of reform is to increase
benefits for injured workers while making technical corrections designed to
reduce fraud or waste. The reduced costs resulting from technical corrections
are expected to partially offset the higher costs resulting from benefit increases.
Employers and insurer representatives are usually asked to participate in
the reform process. This article provides a list of issues that employers should
consider when there is an opportunity to reform their state's workers compensation
system.
No Indexing of Maximum Benefit Rate
Most states began indexing maximum indemnity benefits rates several years
ago and have lost one of the main drivers for keeping balance in the workers
compensation system. Indexing means that the maximum benefit rate is tied to
a statistical number, typically the state average weekly wage (SAWW). In most
cases, the maximum benefit rates for temporary total disability benefits, temporary
partial, and permanent partial are all set at a percentage of the SAWW. If the
SAWW increases, maximum benefit rates increases as well.
The problem with indexed benefits is that they eliminate one of the greatest
drivers for legislatures to review workers compensation statutes. When benefits
could only increase as part of a legislative package, there was an impetus to
periodically review the workers compensation statute to make sure benefits kept
pace with inflation. The need for benefit rate increases also served as an incentive
for employee groups, such as labor unions, to compromise and agree to changes
that cured abuses and tightened eligibility requirements.
Once benefits are indexed, they automatically keep pace with inflation and
there is little incentive for employee groups to agree to reform and there is
little for employer groups to offer in exchange for cost-cutting changes to
eligibility standards. Because of this, employers should oppose indexing of
benefits so that benefits can only be increased as part of a broader reform
effort that looks at all aspects of the workers compensation system.
Develop Rational Benefit Calculations and Reasonable Minimums
Benefit calculations and minimum benefit rates can produce irrational results
that make cases difficult and expensive to resolve. One problem is with seasonal
employees where the average weekly wage (AWW) of an injured worker can be inflated.
The average weekly wage is important because the benefit rate is set at a percentage
of the AWW, usually 66 2/3 percent.
A typical problem is that the employee's AWW is influenced by the business
cycle. For instance, an employee's AWW may be based on wages in the 13 weeks
preceding his or her injury. If so, an employee injured right at the end of
the employer's busy season, where significant overtime was worked, would have
an abnormally high average weekly wage and an abnormally high benefit. The employee's
workers compensation benefit could be more than he or she would earn during
a normal workweek outside the employer's peak season. If so, the inflated rate
would clearly create a disincentive for the employee to return to work.
Minimum benefit rates can cause a similar problem. In some states the minimum
benefit rate is more than most part time employees earn in a typical week. Under
this rule, an injured part-time employee would receive more in workers compensation
benefits, which are tax-free, than he or she would earn in taxable income if
on the job. Obviously, this too creates a disincentive to return to work.
In addition to the disincentives, irrational AWW calculations cause a fairness
issue. For instance, two employees injured while working the same job for the
same pay may be eligible for dramatically different compensation rates depending
on when during the year they are injured. If one was injured before the busy
season, his or her benefit rate would be much lower than the rate paid to an
employee injured just after the busy season.
In the case of part-time employees, it is also unfair for injured workers
to collect tax-free "wage replacement" benefits that exceed the taxable earnings
of fellow employees who were not injured and remain on the job.
AWW calculations and benefit rates should not be set so that they result
in unreasonable compensation for some employees and inequities in the system.
AWW calculations should be based on actual annual earnings for a 52-week period,
and there should be no minimum compensation rates.
Employer Medical Control
Control of medical care is an important cost control tool for employers and
their insurers. Medical control allows the employer or its insurer to select
the medical providers that will treat injured workers.
A few states allow employers to fully control care for the life of a claim.
Some allow employers total control, but for a limited period of time. In some,
employers can limit care to a "panel" of providers, which is a list of providers
chosen by the employer. The majority of states allow the employee complete freedom
to choose medical providers.
Medical control is important because it allows the employer to provide quality
care from a provider experienced in treating occupational injuries. The employer
can familiarize the provider with its work site, the exposures in the work site,
and in the return-to-work process. This facilitates the fastest possible recovery
and return to work.
Medical control is an advantage that employers should seek to gain, retain,
or improve as part of reform efforts. As a practical matter, absolute control
may be difficult to win. If a compromise is required, a time limit is preferable
to a panel. The problem with panels is that it is often difficult to find enough
quality providers to fill a panel. It is also difficult to keep all the providers
on a panel up to date on exposures and return-to-work practices. Moreover, in
smaller cities a panel may need to include almost every provider in the vicinity.
Avoid Mandates for Managed Medical Care
Some states have implemented mandates for some forms of managed medical care
at a time when many employers are beginning to question its effectiveness and
are becoming more reluctant to use it. Some states now require that a case manager
be assigned to every case that meets certain guidelines, such as 60 days of
lost time. Others require a managed care nurse to review all requests for medical
services.
From an employer's or insurer's perspective, there is no need for such a
mandate because managed care can already be used in any situation where it adds
value. If an onsite nurse case manager is needed, or if a medical professional
is needed to review a request for service, one can be assigned. Therefore, the
mandate only serves to require that a case manger be assigned if the employer
or insurer would not otherwise assign one because it would not add value.
Mandating that case managers review all requests for medical services can
also cause problems if medical personnel infringe on the role of adjusters.
This is possible because many of the issues that are presented under the guise
of medical utilization review are actually claims issues that should be managed
by a trained adjuster. For example, an employee with a low back injury may request
approval for an MRI of the cervical spine. Whether the MRI should be authorized
is not strictly a medical question. It may indeed be appropriate based on the
clinical findings, but the other question a medical person cannot answer is
if the cervical problem is related to the original work injury and whether it
should be allowed as part of the initial claim. This is a distinction many medical
reviewers are not trained to make and often fail to make properly.
There is definitely a role for managed medical care and medical case management
in workers compensation, but that role should not be mandated by the state.
Perhaps a state should pass legislation enabling the use of managed medical
care, but the decision on whether to use it or not should be a claim-by-claim
decision made by an experienced claims handler.
A Rational Permanent Partial Disability System
Permanent partial disability (PPD) can be a major cost-driver in a workers
compensation system. This can be seen in the statistics in many states that
show PPD payments to be a significant portion of all payments. While alarming,
these statistics alone do not show the full picture because the full cost of
PPD can be far in excess of the direct cost of PPD benefits. That is because
there are many system costs that are driven by the PPD process that do not show
up as up as PPD payments.
All PPD systems must contain an element of subjectivity because there is
no way to precisely and objectively measure permanent disability. The subjectivity
is itself a problem because it leads to unpredictability, disputes, and litigation,
all of which drive costs.
In some states, the amount of PPD awarded is partially dependent on the amount
of time the injured employee missed from work due to the injury, the amount
of medical care received, and the final disposition of the employee's work status.
This creates an incentive for employees to stay off work, treat more, and fight
for the most significant permanent work restrictions. Therefore, the true cost
of PPD is the direct benefits paid plus the additional temporary disability
and medical benefits paid because of the conflicting incentives plus the cost
of litigation arising from the uncertainty in the process.
A logical argument could be made for eliminating PPD altogether. The theoretical
basis for PPD is that it compensates injured workers for future wage loss that
could result from the permanent effects of their injuries. In all likelihood,
few employees understand the purpose of PPD awards, and most employees probably
spend awards rather than investing them in case of a future wage loss. Although
a logical case can be made for eliminating PPD, it is probably not a realistic
expectation. Therefore, the goal should be to institute the most reasonable
guidelines possible.
One way to improve the PPD system is to base awards strictly on medical impairment
rather than on vocational impairment. Medical impairment ratings are determined
by measuring the residual loss of function after an employee has reached maximum
recovery. Vocational awards are based on the employee's loss of earning capacity.
Loss of earning capacity is determined using a number of factors, including
the medical impairment rating, age, training, skills, experience, and the applicable
labor market.
Medical ratings are far more predictable and have a basis in science. They
are usually assigned by a medical provider using an objective tool, such as
the American Medical Association's guide to rating permanent impairment. By
contrast, vocational disability is determined by a much less scientific process
and one that is often little more than speculation by a hearing officer. This
makes vocational ratings highly unpredictable. Moreover, vocational ratings
often produce illogical results. It is possible for employees with relatively
minor injuries to receive extremely high awards even if they return to their
pre-injury job. There have even been cases of employees who returned to full-time
work after being awarded 100 percent vocational disability.
Awards based on medical impairment are not perfect and are somewhat susceptible
to the biases of the examining doctor, but they are far more predictable and
rational than vocational impairment awards. Employers should prefer them to
vocational awards.
The Issue of Attorney Fees
A second area to consider is the method for dispute resolution and the process
for awarding attorney fees. It is best to handle disputes similar to binding
arbitration where attorney fees are only awarded on the actual increase in benefits
earned for the client. This is best illustrated with an example.
Suppose an employee is injured on the job and is ultimately entitled to a
$4,000 PPD award based on the rating assigned by the employer's doctor. The
employee retains an attorney who files a claim and sends the employee for another
opinion. The second examiner opines that the employee has disability entitling
him to $6,000 in PPD. After several months in the litigation process, the case
is ultimately settled for $5,000.
Following the traditional process, $500 would be deducted from the employee's
award to pay for the medical examination used to support his case. An attorney
fee of $675 (15 percent of the settlement net the expense of the medical examination)
would also be deducted. The employee would ultimately receive $3,825, which
is less than he would have received if the case had never gone to litigation.
The way the system should have worked is that the employer should have paid
the employee $4,000 immediately based on its medical examiner's opinion. The
$4,000 was not in dispute because the employer had no basis to argue that it
was not owed. There is no reason for the employee to wait for the litigation
process to run before receiving payments that are not disputed, and there is
no reason for the employee to pay an attorney fee on them.
If an attorney represented the employee and obtained the second opinion indicating
that a $6,000 award was appropriate, the employee could have filed for additional
compensation. If the employee prevailed, the attorney could deduct the cost
of the medical examination from the additional $2,000 in compensation and a
fee based on the incremental award. The attorney would not be entitled to a
fee on the $4,000 undisputed portion of the award.
Managing disputes in this fashion would lead to bigger payments being made
more quickly to injured workers. It would reduce the frictional cost of litigation
because it would discourage frivolous litigation. Attorneys would have no incentive
to file cases unless they legitimately believed they could earn a significant
increase in benefits for their client. Employers and insurers could totally
avoid litigation by fairly and promptly paying the compensation that was due
to injured employees.
Restrict Permanent Total Disability Awards
Permanent total disability (PTD) is a major cost driver in some of the states
with high cost workers compensation systems. PTD is awarded to injured workers
if it is determined that their injuries are too severe for them to ever work
again. In most states, PTD awards are limited, as they should be. The goal of
the workers compensation system should be to return injured workers to productive
employment. Even severely injured workers should have a goal of returning to
a productive lifestyle, and the entire system should be geared toward encouraging
and facilitating this goal. Indeed, it is quite possible for paraplegics to
return to gainful employment, and many do.
In a few states, PTD awards are not very difficult to obtain and are routinely
granted even for injuries that hardly seem severe enough to merit such treatment.
PTD cases are expensive because many states have a built-in cost of living adjustment
so that benefits keep pace with inflation. The inflationary increases can ultimately
exceed the initial benefit entitlement if the employee lives for several years
after being declared permanently and totally disabled. Moreover, PTD awards
are usually paid for life, and benefits continue long after an employee would
normally have retired. This means an employee who becomes permanently totally
disabled would be expected to collect benefits for more than 30 years with an
annual increase in the benefit rate. Insurers and employers must reserve for
the full expected cost of benefits once an award is made, and this can amount
to several hundred thousand dollars for every PTD case.
Regardless of how much a PTD award costs, few would argue that they are not
justified when there is a tragic and severe injury. The problem is that the
criteria for awarding PTD in some states has become too liberal and considers
issues other than the work injury. For instance, some state systems would allow
a 55-year-old employee with relatively minor knee injury to qualify for PTD
if there were extenuating circumstances. If the employee's activity was further
limited because he was morbidly obese, and if he had little training and education,
he might qualify for a PTD award based on all the vocational factors combined.
Like many other issues, a liberal PTD system can lead to inequitable results.
In the instance describe above, the employee with a relatively minor knee injury
would receive the same compensation as an employee rendered a paraplegic by
a work-related fall. Also, the award of PTD is hardly fair to fellow employees
who remain on the job. The injured employee will essentially retire at age 55
with a guarantee of lifelong income adjusted for inflation. The entitlement
to benefits is only partially due to the work injury, but that alone would not
have qualified the employee for an award of PTD. The award of PTD is based largely
on the employee's personal lifestyle-related obesity and his failure to gain
any skills or education while in the workforce.
In some states PTD awards are linked to entitlement to Social Security disability
income (SSDI) benefits. In those states, receipt of SSDI creates a presumption
that the employee is permanently and totally disabled. This can be a problem
because SSDI is far more liberally granted than PTD should be. States should
not link PTD to SSDI, and eligibility for PTD should be determined by the state
independently of SSDI rights.
States should also establish very restrictive requirements for PTD so that
injured workers do not qualify for the benefit unless they have a severe injury
that would make it impossible for most properly motivated people to return to
work. In making this determination, injured workers should not be "given credit"
for failure to gain reasonable skill or training while in the workforce or for
personal medical conditions.
An Orderly Litigation Process
Finally, costs can be reduced by creating a more orderly litigation system
where dates and rules of practice are enforced. In many states, the litigation
process is too forgiving, and cases are not managed well by attorneys. This
causes delays in the system and a general perception that "anything goes." In
this environment, some plaintiff attorneys file claims with no understanding
of whether legitimate issues exist. Some attorneys are slow to prepare cases
for hearings and move them toward resolution. In many states, it is common to
find dozens of cases scheduled for hearing on most days even though it would
only be possible for a commissioner or hearing officer to hold one or two hearings.
It is simply understood that most of the parties scheduled for a hearing will
not be prepared and will not be able to proceed.
This sort of system clearly does not benefit employees who may be forced
to wait months or years for a hearing, perhaps with no income. It also costs
employers who must pay attorneys over the entire course of the case, and it
burdens workers compensation boards that must deal with hundreds of cases that
should never have been filed or should have been more quickly resolved. A workers
compensation system should have clear dates and timeframes for managing litigation
and resolving disputes and these should be enforced.
Conclusion
These are just a few of the more significant areas employers and insurers
should be attuned to when it is time for workers compensation reform. Those
in states where these problems already exist should attempt to fix them when
they can. Those in states that do not have them should be aware of the potential
problems that can result from seemingly minor and seemingly technical changes,
and do everything possible to prevent them from affecting their states.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.