By PETER ROUSMANIERE, an expert on the workers' compensation industry
In the centennial year of workers' compensation, how is America's first mandated employee benefit program affecting the American employer?
At first blush, employers have done well by the workers' comp system, to which most contribute in the form of insurance premiums. Employers enjoy freedom from liability to civil suits and from having benefits defined by law. Costs as a percentage of payroll are the lowest they've been in a generation.
The National Academy of Social Insurance recently reported that in 2009 employer costs for workers' compensation averaged $1.30 per $100 of payroll, the lowest recorded since the academy began tracking the figure in 1980.
State legislative trends for workers' comp by and large favor the employer. Managed care provisions designed to better control medical spending, such as those that have passed recently in Montana and Illinois, for example, are almost uniformly pro-business.
America's workers' comp system, which has not really strayed from its original design over the past 100 years, exempts employers from liability suits arising out of work injuries. By defining benefits by law, the workers' comp system improves the predictability of financial exposure for employers who crave earnings stability.
Yet corporate risk managers are burdened today in managing their work-injury risks to a greater extent than they have ever been.
In the area of medical management, to use one example, the complexity of Medicare settlements, for which companies must put aside money to reimburse Medicare for Medicare-related expenses for a worker's injury, is difficult to navigate.
As a result, companies require more expertise, and the overhead for managing injury risks goes up, not down.
Through most hard and soft insurance cycles, premiums don't change much from year to year, but an episode of destabilizing cost escalation occurred in the 1980s. In 1983, employers were charged $1.49 per $100 of payroll for workers' comp. By 1989, it had jumped to $2.18 per $100 of payroll, an increase of 46 percent. Employers were forced to beef up their accident-prevention programs and invest heavily in injury-management practices.
For medical management alone, the variety of required expertise has grown so much that national managed care companies like CorVel have created online portals to simplify for their customers the ordering of a range of services.
And who is delegated the responsibility for managing all these programs? Corporate workers' comp and disability managers.
Benefits like health insurance and long- and short-term disability, which cropped up in the 1950s, were joined by benefits related to the Family and Medical Leave Act, passed by Congress in 1993.
Adding new layers of benefits resulted in a chasm between managing work-injury risks and other employee risks. Workers' comp, originally designed as a standalone benefit program, has become part of an array of benefit programs offered by many midsize and large employers.
With the help of more advanced benefits management information systems and innovations in analysis of benefits costs, employers began to fight back in their attempts to control the total cost of these benefit programs.
Variability at issue
Comparable employers' workers' comp costs can vary by as such as two or three times, due to the management practices of individual employers. Employers often experience big variations in work-injury costs among comparable business units. Even among similar employers, nursing homes for instance, work-injury costs can vary sharply.
These variations can be largely traced back to how managers act. An attentive employer with high injury risk, a bridge construction contractor, for example, located in a state with relatively high average workers' comp premiums like New York can enjoy lower costs per employee than a poorly managed lower injury-risk employer, a car dealership for example, in a state like Wisconsin with moderate average premiums.
The well-managed employer tends to be charged more premium than it should, and the poorly managed employer, meanwhile, is often charged less premium than it should, according to an analysis of premium pricing by Denver-based Valen Technologies.
Since the premium spike in the late 1980s, employers, through the use of self-insurance, high-deductible strategies and loss-sensitive insurance policies, have made use of risk-retention strategies to reduce workers' comp costs.
Many employers urgently adopted these strategies, said Rick Betterley, president of Betterley Risk Consultants. "Their use lagged after the workers' comp monster was beaten back into its cave, but cost control is more effective and widespread," than before the 1980s, he said.
Many risk-retention strategies have been successful, justifying the additional expertise of attending to them. But they are inherently more risky than conventional insurance.
New York state's Workers Compensation Board, for example, failed due to inattention to foresee insolvencies of pools managed by Compensation Risk Managers LLC. The insolvencies left hundreds of members of self-insurance groups subject to court-approved assessments that may run as high as $1 billion.
Where legislatures and their regulators have paid attention, their work has proven to be a mixed blessing. In no other area of employee benefits, with the possible exception of the Family and Medical Leave Act, is government oversight so intrusive and unwieldy, a burden that falls on the employer.
In 1951, the then-president of the International Association of Industrial Accident Boards and Commissions, James L. Hill, leveled a charge against state legislation that remains true today.
He lamented the "annual or biennial deluge of ill-considered bills to amend the laws, dumped upon the legislatures," he said. "In general the changes were inexpert. In some jurisdictions, certain factions fearful of changes adversely affecting their own interests, blocked the normal course of development, and the obsolete patterns were frozen."
The burden has become so great that many companies in Texas have washed their hands of the no-fault workers' comp system, with all its rigidity and complexity. As a result, employers have taken to the unique "nonsubscriber" Texas program to opt out, even at the risk of taking on liability exposure.
Employers opting out sign agreements with their employees and run medical costs of injury treatment through employee group health plans, which pay for medical care to the injured worker. Workers' comp is not even part of the mix.
Marriott International, a Texas nonsubscriber for many years, has designed a benefit package for injured workers, which Robert Steggert, vice president of claims for the hotel chain, said is more generous than benefits under workers' comp.
Workers' comp was designed a century ago as a landmark, standalone system of benefits, but this go-it-alone design today may be creating headaches for employers as work-injury risks have commingled with employee health risks also covered by other benefit programs.
Workers' comp claims costs are driven by nonoccupational chronic conditions and lifestyle health habits. The cost of other benefits programs are also driven by these chronic conditions and lifestyle habits.
The worker, the nature of the work injury, and employee benefits have changed over 100 years. In 1911, workers injured at age 30 could be expected to live for another 25 years. The average male worker today just before injury is over 40, and can expect to live another 38 years.
In 1911, the primary issues with work injuries involved traumatic accidents around hazardous machinery and worksites as many workers lost limbs in accidents involving big, heavy machines.
A century later, most of the hazards at workplaces have disappeared or have been sharply reduced. The safety problem, while it can never be "solved," is greatly mitigated.
To address work-injury risk today, the focus is more on treatment and recovery. Personal chronic conditions and lifestyle health habits, though they may not cause injuries, most definitely complicate recovery.
A recent Duke University study of the extended disabilities among work-injured obese workers was a wake-up call that lifestyle health behaviors do have an effect on the severity on workers' comp plans.
In 1911, the worker had no company health plan or disability protections. The situation now is reversed, but only at mounting costs to employers. Between 1999 and 2009, the employer share of family health insurance premiums rose on average from $240 to $550 per month, an increase of 127 percent, as chronic conditions and lifestyle health habits literally cost corporate-sponsored benefits an arm and a leg.
Karen English, a partner at Boston-based Spring Consulting Group, recounts how employers since the early 1990s have been trying to integrate parts of workers' comp with other employee programs, in part to address the shared financial exposure arising from chronic conditions and lifestyle health habits.
"When 24-hour coverage (of workers' comp and health benefits) did not fly in the early 1990s, employers started to integrate the pieces that they could," English said. "Every organization has its own barriers. Sometimes there are turf and personality issues."
More employers are trying to integrate disability management, however difficult it is to do. For example, according to a survey by English, about 40 percent of employers trying to integrate benefit programs have included workers' comp in the mix, up from 10 percent just two years ago.
There is a limit to integration. For instance, health insurance plans have been increasing financial incentives for covered persons to improve their lifestyle habits. It is the rare employer that will try to inject health-related incentives into its workers' comp claims program.
Can integration still work? Yes, said Marcia Carruthers, CEO of the San Diego-based Disability Management Employer Coalition.
"We can now prove through experience and data that integration or coordinated programs save employers money, increase productivity, and decrease absence," she said. "Workers' comp and benefits need to work together shoulder to shoulder."
The workers' comp system has provided for predictability and, especially today, low cost. But the system may, by law and culture, handcuff employers. Are employers still getting a bargain, or are they now on the raw end of the deal?
November 1, 2011
Copyright 2011© LRP Publications