The Real Solution to the Workers' Compensation "Problem"

In an article on June 23 the Times heralded another workers' compensation crisis saying that costs were "soaring" and "adding yet another heavy burden on business." The article quotes an insurance industry spokesperson as saying that costs have gone up 50 percent in the last three years.

Independent estimates from organizations such as the National Academy of Social Insurance suggest that the increase in rates is much smaller than that, perhaps in the neighborhood of five or ten percent. Moreover, there is no doubt that the cost today is still substantially less than it was ten years ago, perhaps by as much as 30 percent.

The article correctly points out that much of the current increase results from the fact that insurance companies voluntarily sold insurance at below cost rates during the late 1990s. It is thus only logical that there should be an increase now. The article acknowledged that much of the current increase in costs is in payments that go to doctors and hospitals -- not workers. It also mentioned that the events of 9/11 played a role in the current price increases. Through the mechanism of reinsurance the costs of that tragedy have been spread across all lines of insurance in all states.

Thus we should keep in mind that the cost increase is small and not caused primarily by increased benefits to workers.

The most unfortunate part of this "crisis" approach is the attitude that businesses cannot control their workers' compensation costs. The president of the California Chamber of Commerce is quoted as saying, "The only way to reduce your cost is to reduce your payroll." This is simply not true.

Research in the 1980s by the Upjohn Institute for Employment Research and Michigan State University demonstrated that there are big differences in workers' compensation experience among employers within the same industries in the same states. Within every one of the 29 industries examined the worst employers had ten times as many claims as the best employers.

First and foremost employers can control their costs through safety. Many employers have dramatically reduced their costs in the last ten years by serious efforts to prevent injuries.

Return to work programs have also been extremely successful in reducing workers' compensation costs. Data from the Bureau of Labor Statistics show dramatic reductions in the number of injuries with full days away from work but an increase in the number of injuries with restricted duty but no full days away. This is the result of return to work programs. The most successful employers accommodate the needs of injured workers and give them meaningful work while they recover. This saves money for the employer and also prevents the worker from falling into a pattern of disability.

The California Insurance Commissioner is quoted as indicating that he has yet to find a business that is paying only the average price increases. If this is an accurate representation of his views, it is an incredibly silly way to approach this problem. Garrison Keillor says that in Lake Wobegone all the children are above average but he is joking.

In fact nearly all workers' compensation insurance rates are "experience rated." That means that an employer's premiums are based on its own experience. Employers that control losses through safety and return to work programs pay less. Employers that injure more workers and refuse to take them back to work pay more.

Sometimes insurance commissioners and chambers of commerce are tempted to tell employers that the only way to deal with high workers' compensation costs is to support politicians and trade associations who will change the law and take benefits away from workers. In fact those employers who are willing to take responsibility for their own experience can control costs themselves.

In the late 1980s and early 1990s there was a crisis atmosphere about workers' compensation and many states made it harder to qualify for benefits and reduced benefits available. Since then the number of injuries and the costs to employers have gone down dramatically. There has been a slight increase in the last few years. There are some politicians who would enhance their own situation by leading another bandwagon to reduce benefits further.

But there is a much better solution. If employers will prevent injuries, provide good health care when they do occur and help injured workers back to reasonable productive jobs as soon as possible, they will reduce their own costs and help their employees at the same time.



Prof. Edward M. Welch
Director
Workers' Compensation Center
Michigan State University
welche@msu.edu
517 432-7727