BY PETER ROUSMANIERE, an expert on the workers' compensation industry
Keeping workers' compensation insurance costs down is one of the best ways to lower the total cost of business in a state. This matters to employers, who want to make sure they get the biggest bang for their buck. This is especially so in a recession, when every company in the country is looking to cut costs.
So, it's no surprise that when corporate executives opine--or whine--about the rate of a particular premium tax or the health of an individual state's economy, they cite trends in workers' comp premiums.
Many employers in most states have experienced declining workers' comp premiums due to the soft market, but that can't last as loss ratios have deteriorated as well, and carriers are under pressure to increase rates.
To be sure, worker's comp accident rates are going down nationwide. In fact, they have tanked by 30 percent since 2000, but laggard employers--employers who are not doing all they can to keep workers safe--require that the workers' comp industry as a whole remain vigilant, lest it lead to higher accident rates.
Employers also need to be concerned about the adequacy of benefits to injured workers. Even though employers typically look only at insurance costs when sizing up a state, how effectively a workers' comp system delivers is affected by the relative level of benefits.
It is in the interest of employers that injured worker benefits appear as fair, and that claims are resolved fairly, so as to dampen efforts by labor and claimant attorney associations to squeeze more money out of the system. A system that appears to be fair will lead employers and labor to collaborate in reducing accident rates and in making incremental adjustments to the system as the needs arise.
It is no fluke that some states with the highest workers' comp insurance costs like New Jersey, New York and Montana also have very low benefits. Low benefits paid to workers do not guarantee low insurance costs. Injured workers receiving low weekly indemnity benefits do not prevent the system from being very litigious.
Nor is it an accident that Massachusetts, where collaboration between regulators and carriers has been relatively good, has very low insurance costs and very high wage replacement benefits.
Risk & Insurance® looked at four factors that indicate how well a state's workers' comp system may be working. Those factors were adjusted by giving additional weight to the amount of premium charged to the employer, and the benefits paid to claimants. The states are ranked by their composite score.
Click here for our table showing how all 50 states' workers' comp systems performed.
The question for workers' comp and disability managers is which states came out on top?
States at the top of the distribution, with summary grades of A- or better, include Iowa, Arkansas, Arizona, Virginia, Nevada and Massachusetts. The states at the bottom of the list, with a summary grade of C or worse, include Alaska, California, New Jersey, New York and Montana.
Four states with the very lowest insurance costs, Arkansas, Indiana, North Dakota and Utah, provide relatively stingy benefits, which may be good for employers but not for recipients.
How does Massachusetts come out on top with the best workers' compensation system among the 50 states? More surprising still is the state's apparent workers' comp paradox: its insurance costs are among the lowest, while benefits to claimants are among the most generous. How can that be? Particularly when the Bay State's record of reducing the frequency of lost-time injuries is, at best, average.
For Massachusetts, success didn't come overnight. The seeds were sown more than a decade ago, in the early 1990s, when Massachusettsbegan tackling the thorny problem of insurance costs. Now, more than 15 years later, the state is enjoying the fruit of its reform labors.
In addition, Massachusetts has managed to keep the labor and the employer communities focused on making sure that the system works for all parties. The state was, for example, one of the first to crack down on the abuse by employers listing employees as independent contractors, thereby avoiding employer-based workers' compensation coverage.
More recently, Massachusetts launched a program to root out fraud in which employers underreport the amount of employee exposure, and thus avoid buying their fair share of workers' comp insurance.
Part of Massachusetts' success in driving down costs has also been its very low medical fee schedule, according to healthcare consultant Joseph Paduda, principal of Health Strategy Associates.
The Massachusetts story, having gone from one of the most expensive workers' comp states to one of the least expensive, is by most accounts a stunning success. In the end, it was the state's "proactive and analytical approach" to reform, said James Campbell, a former Massachusetts industrial accidents commissioner.
That was when former Gov. William Weld, the legislature and the business community, sat down to tackle head-on the problem of out-of-control Massachusetts workers' comp costs, Campbell said.
In contrast to Massachusetts, the state of Montana wallows at the bottom of the distribution. All it could muster was a grade of C-. Why the ugly clouds on the horizon of the Big Sky state? Its insurance costs are among the highest, yet worker benefits are significantly inferior compared with other states.
The workers' comp system "has become a major concern," said Carl Kochman, communications director for the Montana State Fund. Premiums as well as injury rates are high, he admitted.
The high injury rate, added Kochman, can be attributed in part to what he called a "social culture in which everyone's going to get hurt," because of the risks workers there are willing to take to participate in an economy anchored in lumber, agriculture and mining.
The higher injury rate trend, however, has caught the attention of lawmakers. Not content with the wounded state of workers' comp affairs, Missoula legislators have launched a study of Montana's workers' comp trends.
In addition, a coalition is preparing to launch a "Work Safe MT" partnership to reduce the rate of injuries. Kochman, who chairs the partnership, said the campaign was aimed at reducing the rate of work accidents.
Work Safe MT includes the Montana Chamber of Commerce, labor unions, state agencies, insurance executives, doctors, and, of course, the trial lawyers.
Between the extremes of Massachusetts and Montana lie the other 48 states, with grades of A to C.
Alaska, near the bottom of the heap, turned in a grade of C. It may, however, soon be joining Montana at the very bottom, as the state has been on a downward trend over the last few years.
"The state struggles with a medical cost crisis in which 72 cents for every dollar spent in workers' comp is going to the provider," said Phil Lefevre, senior account executive of the Work Loss Data Institute, an independent database development company focused on workplace health and productivity.
Alaska, Lefevre also said, is on a "negative slope indicative of more problems on the horizon, which we are actually seeing play out right now." A committee has been launched to look at potential reforms in the medical area.
The disparities in the state-based workers' comp system are eye-opening. The data shows Hawaii, for example, posting 2.6 lost-time injuries per 100 workers, far above the state median rate of 1.5 lost-time injuries per 100 workers.
Median duration of disability for lost-time injuries, compiled from Bureau of Labor Statistics and Occupational Safety and Health Administration logs, ranged from four days in some better-performing states to as many as 12 days for the state of New York.
Employers throughout the country are well aware of variances among states.
"When we track our dollar losses by state, we see wide workers' comp cost variances," said Bob Steggert, vice president of casualty claims for Marriot International. For example, California represents 16 percent of corporate revenue, he said, but amounts to about 33 percent of workers' comp losses.
Conversely, Florida represents 14 percent of Marriott's corporate revenue, yet just 10 percent of workers' comp losses, he said.
"These cost variances depict both workers' comp systems' efficiency and, following our analysis, opportunities to improve workers' comp programs, in the best sense of the word," said Steggert.
Pennsylvania, which turned in a score of B+, and Vermont, which turned in a grade of C+, are both examples of states sporting high wage replacement rates along with high insurance costs. Pennsylvania's very high benefits counterbalances its high insurance costs to produce a relatively good composite score.
Arkansas, Indiana, North Dakota and Utah all have relatively low benefits and low insurance costs. States with the highest insurance costs are Alaska, Delaware, California, Illinois, Montana, Ohio and Vermont.
The situation to avoid at all costs is for a state to find itself dispensing low benefits to workers, yet charging high insurance costs to employers. This is where we find the state of New York.
Its wage replacement rates for claimants are low and its workers' comp premiums levied on employers are high. No surprise, then, that the state is in the throes of reform for its workers' comp program because nobody is satisfied with the status quo.
New York state's grade of C does not take into account a gigantic, $18 billion actuarial deficit in its Second Injury Fund, which developed after insurers went on a binge of filing for reimbursement from the fund in the early years of this decade.
The deficit ballooned after the state failed to keep assessments on insurers, which provide the funding, in line with rising costs. As lawmakers struggle to reduce the deficit, employers can expect to be slapped with extra assessments.
Were the deficit taken into account the Empire State's grade might even have dipped to as low as C-, joining Montana.
The forces battering New York also affect other states as higher medical costs mean higher insurance. Medical costs, said consultant Joe Paduda, are "out of control," and the National Council on Compensation Insurance Inc. reports that medical payments when spread over every worker, range from under $200 in some states to more than $800 in others.
How do states' workers' comp systems rise to the top of the heap? They do so by improving accident rates and lowering disability duration, and turning in low insurance costs and/or providing generous benefits--ideally all at once. For states aspiring to protect a high grade or to move up the scale, the agenda is clear.
Their respective lawmakers need to put aside the partisan squabbling and give equal billing to labor protections and insurance cost reductions, while at the same time keeping claimant attorneys at bay.
Rather than trimming worker benefits, states need to focus on streamlining the resolution of disputed claims, and to focus on controlling medical costs through fee schedules, treatment guidelines, and provider networks.
How likely is that to happen? Not very likely, perhaps, according to the skeptics, but it has happened.
It's exactly what happened in California. The state's stratospherically high insurance costs of five years ago declined sharply because of insurance reforms adopted four years ago.
Because of this, the state's position improved. However, insurance costs in the state have recently started to increase again, and employers may well be hit with a substantial rate increase in 2010.
November 1, 2009
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