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Employers in the 1980s struggled under the burden of an expensive and unresponsive workers compensation insurance market, but by the early 1990s they had solved many of their problems through legislative reforms, loss-control programs and increased use of self-insurance.
Rates that employers deemed unaffordable and capacity that was sometimes scarce because workers comp insurers were suffering poor underwriting results encouraged employers to change the system.
The turnaround is evident in data from the National Council on Compensation Insurance. Between 1992 and 1994, workers comp insurers' combined ratio improved to 100% from 122%.
Improved results have continued since then, with 1995's ratio at 97%and 1996 at 101%, according to the Boca Raton, Fla.-based statistical and rate-making agency.
Whether those improvements will continue, however, depends upon employers' willingness to use claims data to improve their programs and to monitor legislative activities, some experts say.
And a few observers warn that pro-employer reforms have gone too far and that a backlash by workers and labor union may be brewing.
Understanding how the turnaround occurred requires scrutinizing the root causes of the affordability and availability problems of 1984-1992:
* Residual market burdens became unwieldy in many states.
* State workers comp regulators were reluctant to raise rates, so insurers could not pass the higher costs on to employers.
* Several insurers withdrew from troubled markets.
* A recession hurt economies on both coasts.
"The (workers compensation) insurance crisis was a product of the claims cost crisis," said Eric Oxfeld, president of Washington-based UWC Strategic Services on Unemployment and Workers Compensation, formerly known as UBA Inc.
Higher claims costs stemmed from significant improvements in benefit payments following a 1972 report by the National Commission on State Workmen's Compensation Laws. That commission was established as part of the Occupational Safety and Health Act of 1970.
There was general agreement in the workers compensation community that benefits needed to be improved, especially to avoid the explicit threat of federal standards for state-based workers comp programs. However, legislation to improve benefits failed to include adequate controls to ensure that benefits remained affordable for employers, Mr. Oxfeld said.
The Commission found that disability benefits were inadequate and developed 19 essential recommendations to improve state workers compensation systems.
A key labor spokesman has a different perspective, though.
Benefits were "pretty pathetic" before the commission's report, said James Ellenberger, assistant director of occupational safety and health for the AFL-CIO in Washington. After the 1972 report, "there was a period of improvement, but that period fell far short of what the commission itself had recommended and what we thought was necessary," he said.
It took risk managers' skills to bring down the rising wage loss costs that helped cause the hard market.
From a risk manager's perspective, "the hard market was the best thing that could have happened to workers comp," said Billie Fae Fuschi, assistant director of workers compensation for Memphis, Tenn.-based Methodist Health Systems Inc.
"It forced employers to come up to the table, put their cards on the table, and revamp their systems," she said. That often required the services of a risk manager who could understand and cope with the complex issues, she added.
As a result, "I think there has been more of an emphasis on loss control."
For example, Tennessee's broad 1992 reforms require employers with poor workers comp experience modification factors to establish safety committees, she said.
In fact, workers comp costs seem to have steadily declined as risk managers' involvement in workers comp increased, said Anne Allen, assistant director for government affairs at the Risk & Insurance Management Society Inc. in New York. Her conclusion was based on comparisons between the organization's 1990 and 1996 "Cost of Risk" surveys.
In addition, employers were forced into self-insurance during the hard market, and many of them continued to favor that approach even after market conditions improved, Ms. Fuschi said.
"There was a tremendous growth in self-insurance as insurance companies' premiums increased so vastly," said Douglas Stevenson, a Chicago attorney and executive director of the National Council of Self-Insurers.
The percentage of self-insuring employers grew from about 20% in 1980 to about 34% by 1995, he said. Nationally, most of the increase was in individual companies self-insuring, though self-insurance groups were particularly popular in a few states like Florida, he said.
However, failures of national trucking companies in the 1980s heightened regulators' concerns about individual self-insurers' solvency and made them impose increasingly strict requirements on self-insurers.
The NCSI responded by encouraging the establishment of guaranty funds for self-insurers of workers compensation, which has increased to 29 currently from seven funds in 1985, Mr. Stevenson said.
Republican victories in state legislative races in the early 1990s also helped set the stage for major pro-employer changes. Those changes included making residual markets more financially self-sufficient, streamlining systems to reduce claims-related litigation and distributing benefits more equitably.
"Temporary total benefits became better distributed," said Richard A. Victor, executive director of the Workers Compensation Research Institute in Cambridge, Mass. As a result, workers at either end of the pay scale received more equitable compensation, rather than higher-paid workers getting too much and lower-paid workers getting too little, he explained.
However, having several states enact caps or shorten the duration of TTD benefits created still-unanswered questions about whether they helped or hurt workers comp systems, Mr. Victor said.
Permanent partial disability benefits are still "a mystery" because measuring the adequacy and equity of these benefits is still "an exceptionally difficult analytical problem," Mr. Victor said.
One of the key elements to properly calculating PPD benefits is reducing subjectivity, Mr. Oxfeld said. That desire has driven some states to adopt rules requiring that the American Medical Assn.'s guidelines be used to determine an injured worker's impairment rating and directly translated into his or her disability rating.
However, Florida, New Mexico, Oregon and Texas have adopted a "cutting edge" approach to PPD determinations by allowing consideration of other factors -- like age and occupation -- or longer benefit durations.
Meanwhile, new laws in several states have helped by streamlining administrative operations, reducing subjectivity in benefit awards and eliminating fraud, which has led to a reduction in litigation, experts say.
Two other general trends also have improved workers comp market conditions.
The incidence of non-fatal worker-related injuries and illnesses fell to 8.1 for every 100 equivalent full-time workers in 1995, the lowest rate in nearly a decade, according to a survey of private industry by the U.S. Department of Labor's Bureau of Labor Statistics released earlier this year.
In addition, workers comp costs were lowered by medical cost management, Mr. Victor said. For example, Medicare created incentives to reduce hospital stays and health care providers increasingly provided services on an outpatient basis.
"All of these efforts at controlling costs have even resulted in rate decreases in many states as cost trends have leveled off," according to the NCCI.
The convergence of these developments in the past few years allowed workers comp to go from problem child to positive role model.
"I think we are in the best of times for seeing change. . .for the better," said Ms. Fuschi of Methodist Health Systems.
Employers are taking a more hands-on approach to dealing with problems and seeking solutions rather than blaming workers, she said.
For example, several businesses voluntarily adopted ergonomics programs that have been successful in reducing musculoskeletal disorders, according to the U.S. General Accounting Office (BI, Sept. 15). Such disorders may be responsible for as much as one-third of the $60 billion that private sector employers spend annually for workers' injuries and illnesses, according to the Department of Labor's Occupational Safety and Health Administration.
The federal government may help employers, too.
While Congress has banned OSHA from issuing a controversial ergonomics standard, OSHA is allowed to continue developing one. In addition, Congress is considering a proposal to let employers who want safe workplaces to obtain compliance evaluations from qualified third-party auditors (BI, Oct. 6). That proposal, part of the Safety Advancement for Employees Act, was voted out of the Senate Labor and Human Resources Oct. 22.
The improved climate is also seen in workers comp insurers' financial results.
The operating performance of workers comp insurers outpaced the rest of the property/casualty industry in 1995 and generated an underwriting profit for the first time in more than 10 years, according to the latest data available from A.M. Best Co. in Oldwick, N.J. The $733 million underwriting gain was an improvement of about $1.25 billion from 1994's $521 million underwriting loss.
While the combined ratio increased from 1995 to 1996, that was "largely due to heavy competition, rate reductions and a reduced level of reserve take downs from earlier accident years," according to the NCCI.
"Not only is there no widespread talk of crisis, but workers comp is becoming innovative," said the WCRI's Mr. Victor. "I think workers comp is increasingly being looked at by the non-workers comp disability management community for lessons about how to manage disability to facilitate prompt return to work and get good outcomes."
While both types of programs have a long way to go to manage outcomes, "the seeds are being planted," he said.
Future progress depends upon that because "I think we have picked the low-hanging fruit, and the next level of cost containment will be much more difficult to achieve. We'll have to measure outcomes to achieve it, to avoid reducing quality," he said.
This is also a time of great change for those involved with workers comp data and research using that data, he said.
Two new WCRI programs are designed to help shift the way state workers comp systems typically improve themselves from the historic cycle of crisis-reform-crisis to more continuous improvement, Mr. Victor said.
The institute's "CompScope" program is designed to measure the performance annually of state workers comp systems in meeting their goals. The WCRI has developed special statistical methods that will allow for meaningful interstate comparisons so the WCRI can benchmark states' performance in their searches for best practices. The first states to participate are California, Massachusetts, Minnesota and Pennsylvania, and more will be added later.
In addition, the WCRI's Disability Management and Benefit Integration program will emphasize finding "what works" by standardizing the measurement of outcomes and quantifying savings.
Better data generally will help large employers and workers comp insurers who represent medium and smaller-sized employers, to continue to control costs, said UWC's Mr. Oxfeld. He recommends doing that by hiring only qualified applicants, maintaining good labor relations, using sound claimant practices and monitoring legislative and regulatory activities.
He also encourages increased use of managed care in workers comp, which can benefit both employers and workers, if it provides better results for workers at lower cost.
However, one of the challenges facing the system is the new but growing sentiment that pro-employer system reforms have gone too far.
"I do believe that we are in an era where there has been a great willingness on the part of employers and insurers to exploit their power and either cut benefits or trim eligibility standards, in some cases unreasonably," said John F. Burton Jr., dean of the School of Management and Labor Relations at Rutgers University in New Brunswick, N.J. "It's a myopic strategy."
For example, total benefits -- cash plus medical -- paid to injured workers nationally declined 9.3%in the 1993-94 period, which was the third consecutive annual decrease, according to a new study he helped research. It was summarized in the July/August issue of John Burton's Workers' Compensation Monitor, just before he ceased being affiliated with that publication.
Current workers comp reforms that decrease workers benefits now seem to be totally out of touch with the modern human resource strategy of showing workers respect by empowering them in their jobs, said Mr. Burton, who chaired the 1972 national commission.
Indeed, business groups and labor are squaring off in Ohio in a statewide referendum in November over recent workers comp reforms sought by employers (BI, Sept. 8).
Overall, "we continue to be concerned about a couple of trends that seem to be part of the grand designs, mostly driven by insurers and some employer groups," said the AFL-CIO's Mr. Ellenberger.
He said those trends include restricting claims related to certain illnesses, injuries and workplace stress; lowering benefits by altering formulas for calculating them; introducing managed care restrictions on medical care and adoption of the American Medical Assn. impairment guidelines.
In addition, "there is a big difference between loss control and loss prevention," said Mr. Ellenberger. Some employers and insurers have been pursuing loss control to keep claim costs down rather than loss prevention, which prevents injuries or illnesses in the first place.