Workers' comp costs: out of control - workers' compensation insurance - Cover Story

Nation's Business, July, 1992 by Roger Thompson

In state after state, in every region of the country, the nation's 81-year-old workers' compensation system is falling the employers and injured workers it was designed to serve.

Just ask Robert Boucher. He'll tell you that in California most small companies like his are just a couple of bogus workers' comp claims away from financial ruin. It almost happened to him.

Boucher fired two of his 17 workers at Astro Flight Inc. in Marina del Rey last fall, figuring that was the end of two problem employees.

He was wrong. In short order, both filed for workers' comp, claiming debilitating stress as a result of their dismissal.

The claims prompted Boucher's insurer to abruptly cancel his policy, and a frantic search turned up no other insurer willing to offer him a policy

Two stress claims blotted out 22 years of nearly accident-free operation and transformed his electric-motor manufacturing business into a workers' comp pariah.

In desperation, Boucher turned to the state's assigned-risk pool, which is required to take any business that can't purchase insurance on the open market. But admission to the pool came at a steep price--a 500 percent surcharge over his former premium of $18,000. Boucher had to come up with $108,000, a ruinous sum equal to nearly half his annual payroll. Because companies can't operate without workers' comp insurance, he had no choice but to dismiss his work force and close down on Nov. 14, 1991.

Bowed but not broken, Boucher launched a one-man letter-writing crusade to every official who might help him in Sacramento, the state capital.

Finally, the governor's office intervened, setting in motion a chain of events that eventually cleared Boucher's record of the bogus claims and rolled back his risk-pool premium to its previous level--$18,000. In January, Astro Flight reopened and now is struggling to rebuild.

Although Boucher's case may be extreme, it is not unique. At a recent breakfast meeting of local small-business owners, Boucher says, "the whole room exploded with emotion" when he mentioned his run-in with the workers' comp system. "Every single person had his own horror story to relate. This cancer is killing thousands and thousands of honest companies. We need a big dose of strong medicine to cure this cancer while we are all still alive."

Disgust and anger over a workers' comp system run amok isn't just a California story. In Maine, Rhode Island, and Massachusetts, the system is in crisis and on the verge of self-destruction. Other states' systems aren't far behind.

The most visible sign of distress is the galloping cost of workers' comp. Job-related injuries and sickness in 1991 cost public and private employers an estimated $62 billion in workers' comp expenditures, nearly triple the amount spent in 1980. At the present growth rate, costs will nearly triple again by the year 2000.

Yet workers' comp insurance companies claim they are drowning in red ink because many state regulators have held the companies' rates far below costs. In fact, insurers in a number of states have lost so much money that they have abandoned the market, leaving small employers to the mercy of assigned-risk pools.

These pools, which exist in all but six states, were created to serve as the insurer of last resort. State laws require insurers to accept assigned-risk companies in proportion to their share of the voluntary market for workers' comp insurance.

In Maine and Rhode Island, states where the voluntary market has all but collapsed, more than 90 percent of all businesses are in the pools. Massachusetts is rapidly approaching that level.

There is no mystery about what's fueling this destructive cost spiral: unrestrained medical costs, excessive legal disputes in what is supposed to be a no-fault system, broadening definitions of job-related injuries, and rampant fraud and abuse.

There also is no shortage of solutions. States such as Oregon and Michigan in recent years have gone from being workers' comp basket cases to models of reform.

In the 1980s, Oregon ranked No. 1 in frequency of permanent partial-disability claims, yet it paid some of the nation's lowest benefits. As a result, litigation to increase benefits was common, and legal costs spiraled out of control.

To cut the state's accident rate, Oregon's 1990 workers' comp overhaul requires all employers with more than 10 workers to set up safety committees. The package also tightens the medical definition of compensable injuries, requires injured workers to seek care from managed-care medical networks, and mandates mediation of disputed claims. While tightening the system, the legislature also doubled disability benefits for injured workers. Even so, the reforms have led to two consecutive years of double-digit premium decreases totaling 23 percent.

In Michigan, some auto workers were using workers' comp like a second pension. Many filed claims shortly after retirement. A 1985 reform law put an end to that abusive practice. At the same time, the state deregulated workers' comp rates, allowing insurers to compete on price. As soon as the law went into effect, rates dropped 33 percent. Equally important, the reforms established a method of dispute resolution that has cut litigation in half.