Current Trends in Workers' Compensation

Saturday, March 11, 2006 | 1

by David DePaolo

The Overview

The workers' compensation industry is a cyclical one. Every seven to ten years we can expect the same general cycle of premium inflation, followed by some business initiated reform agenda, which is then followed by legal challenges and judicial interpretation, then liberalization and eventually premium inflation to start the cycle over.

This cycle likely will continue, but recent indications are that the cycle is shortening, due in large part to the radical changes in workers' compensation that have swept the nation during the last reform trend.

From a national perspective, 2002 through 2005 saw the biggest wave of workers' compensation reform ever. Both the number of states initiating reform and the scope of reform introduced was unprecedented. In the past, workers' compensation reform consisted mostly of tweaks and adjustments by a few "problem" states. Sometimes there would be a significant change to a single part of the system, but never an out and out overhaul like what swept the nation in the past few years.

These radical, sweeping changes to state's workers' compensation systems reflected a shift from liberal benefits and benevolent care, to much more conservative, self-preservation policies. Inherent in these policy changes were reductions in disability benefits, constrictions on the type of medical services authorized, contraction of medical fees, and elimination of supplemental services.

It is now time for the reactionary trend, but the severity of change due to reform was so significant that there is now an increased sense of urgency to undo reforms or lessen their impact. The pendulum is swinging back, but harder and faster than before.

Was it too much too soon?

The first major state to implement sweeping reform was Florida with SB 50A. Passage of SB 50A was frankly not unexpected. A Republican governor in a conservative state with historically stingy benefits, Florida's reform measure sought to reel in hyper-inflated rates by constricting attorney participation via fee constriction and eliminating employer cheats by getting tougher on fraud. The rate making agency for Florida, NCCI, has subsequently come under fire in each consecutive year following the reform bill for being too conservative with its rate recommendations, and has continuously been criticized by the Department of Insurance for using flawed data.

While the Department of Insurance in Florida seeks rate reductions in excess of 20% we are already seeing a degradation of some of the reform elements as litigants start judicially testing the language of the bill with challenges on attorney fees and on ancillary benefits. Major court battles are pending in the appellate courts as this is written.

California's reform started at about the same time as Florida's but was instituted in two waves. The first wave was under then Governor Democrat Gray Davis who sought to allay business interest concerns of rapidly escalating rates and carrier market flight by negotiating compromises in the traditional stepped fashion of incremental change. Davis was seen as too slow and too bureaucratic in a recall challenge and lost an election that was premised by current Governor Arnold Schwarzenegger's "action" campaign based on radical reform with the threat of a voter initiative which would have taken the power to make subsequent changes out of the hands of legislators. This pressure led to SB 899, which instituted a slashing of benefits, medical fees and medical services, and brought about a chorus of criticism for its poorly drafted, highly ambiguous, language which is now under attack from many angles both judicially and legislatively.

Texas, with HB 7, not only attacked medical services, but the bureaucracy itself! This bill was so sweeping that the newly created Division of Workers' Compensation under the Department of Insurance, tasked with the rapid implementation of the new law, was unsure of emergency regulatory authority and procedure. The issues now facing Texas workers' compensation professionals, though, is no different than any of the other states in which radical reform was implemented - confusion, interpretive conflicts, and insecurity.

It is this insecurity which is the destabilizing element of reform; insecurity in what the law actually says, insecurity of industry participants, even insecurity of the business lobby itself as they examine whether reform has gone too far and opened up alternatives to workers' compensation liability (in California, for instance, demise of vocational rehabilitation has opened exposure to a wave of very expensive civil suits alleging discrimination in violation of the Fair Employment and Housing Act).

Insecurity will drive the softening of reform, and in some cases we will see a complete reversal. The "Law of Unintended Consequences" has a profound effect on the implementation of legislative intent.

This perspective is borne out in history. A small example followed the 1993 California reform. In that year, California legislators, prompted by the business lobby, sought to eliminate doctor shopping for medical legal examinations, so they amended the law to provide that the primary treating physician would have a presumption of correctness regarding opinions of permanent disability. It didn't take long for the community to figure out that medical control, important before the change, was paramount after the change. Injured workers and their counsel suddenly were in the best position to drive business to primary treating physicians. The more liberal opinion authors were provided the most business, and as a consequence permanent disability ratings and indemnity rose.

The present state of the workers' compensation industry is likewise in a huge state of instability. Current unknowns are how many physicians will actually stay in the work comp industry, whether representation will be available for both injured workers and carriers/employers, whether the exclusive remedy of workers' compensation will become so eroded that it becomes almost meaningless and whether the state, vis-a-vis divisions of workers' compensation, is powerful enough to manage the turmoil.

Let's take a look at some disturbing trends that lend support to the above paragraph.

Texas had already gone through physician flight. This was a primary impetus for the physician network scheme instituted in HB 7. But will physician networks bring doctors back in to the system? California thought it had initiated control over physicians with its medical network plan - but the network plan was tied to a reimbursement schedule and second guessing by out of state "utilization review" systems, so many physicians are now just giving up, moving to Beverly Hills, and doing plastic surgery (okay - that is a little dramatic, but you get the point).

In my varied discussions with physicians, most expressed tolerance of being in a managed care system - after all that is not much different than contracting as a part of HealthNet or Blue Cross. Most of the physicians also expressed, with a sigh, acceptance of lower fees.

But the straw that breaks the doctor's collective back is the utilization review process - the addition of control over care, reduced fees, and inability to practice medicine are making physicians look to greener pastures. This is evidenced by the marked drop in membership in the California Society of Industrial Medicine and Surgery, which has seen its ranks decline by nearly 50% since reform in 2004.

While this is going on, publicly held workers' compensation carriers are boasting quarter upon quarter of double-digit profit growth. This in and of itself is not bad and I agree with Stanley Zaks, CEO of The Zenith, that there should be no apologies for making a profit. A healthy insurance environment is necessary for a stable workers' compensation system.

But public opinion drives public policy, and insurance companies are just below lawyers and used car sales as favorite public scapegoats. Now, post reform, carriers are under fire in numerous states for being slow to return premium dollars to employers, for squeezing injured workers and their physicians to the detriment of the health of the working populace, and in the worst of scandalous headlines, bilking states from hundreds of millions of dollars through improper shell games (reference to AIG's recent settlement with regulators to return $343 million in fees and taxes due to underreported work comp sales).

Ongoing Reform
Now for the trends - there are two types of trends that we can identify as we go forward this year and next: ongoing reform initiatives, and near-term consequences of reform accomplishments.

Ongoing reform initiatives take on two characteristics - states that are in the process of implementing legislative changes, and states that are in the process of implementing regulatory changes.

States that are still attempting legislative reform include South Dakota and New York. Both states have pending in the legislatures broad reform measures and are still riding on strong sentiment that workers' compensation isn't working.

Most of the nation, though, is in the second trend stage - dealing with implementation of reform accomplishments. There are, likewise, two elements to this trend: regulatory and judicial.

States that are grappling with regulatory implementation of reform include, most notably, Texas, Illinois, and West Virginia, amongst others. The challenge in these states is to provide input as to how the legislative mandate will actually work in practice. There is every reason to believe that the trend of conservative policies will transcend in to the regulatory environment since the job of regulators is to implement the wishes of the legislature. Hawaii last year attempted to institute reform through a regulatory agenda, but the Hawaii Division of Workers' Compensation soon found its regulatory powers circumcised by a legislature that took offense to the attempted end run.

The more troublesome trend, and one that is not a surprise, is the wave of judicial challenge to reform measures. This trend will play out over the course of the next several years as cases make their way up through the appellate process to degrade intended reform goals. Expect attacks on previously sacrosanct institutional presumptions (for instance, testimony by one of the authors of Chapter 18 of the AMA Guides, 5th that would refute that chapter as substantial evidence), as evidence of the falabillity of reform assumptions.

Most of the post reform judicial attacks will seek to undermine attempts to constrict medical care and permanent impairment. While state reforms will provide a presumption in favor of a single medical standard (for example, ACOEM in California or the ODG in Texas), such presumptions are rebuttable, and as the litigating population becomes more educated and adept at researching and presenting alternative evidence, we will see a degradation in the assumptions in the medical equation upon which many reform savings are based.

The national reform agenda is still moving forward. Several states have instituted reform in the past few months, some with predictable results, some that are still pending. Still others are in the process of revising their systems. The key element is, at this time, insecurity brought about by instability. The disturbing part of the current trend is the shortened cycle of reform, which will only increase costs and price spikes. The long term issue is whether the shortened cycles will then lead to longer term instability, which could undermine the financial underpinnings of privately funded workers' compensation systems.

Article by David J. DePaolo. David is an attorney in California and is the CEO of WorkCompCentral. David can be reached at david@workcompcentral.com.

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The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.