The Mystery of Workers' Compensation Reform Solved

Thursday, December 20, 2007 | 0

By John F. Burton, Jr.

Workers’ compensation programs in many states have recently been significantly reformed. The rationale for the reforms is elusive.  There is, however, a plethora of evidence inexorably pointing to the solution to the mystery
of the recent developments.

Recent Developments and the Mystery

Workers’ compensation benefits as a percentage of payroll have declined significantly in the last 15 years. In 1992, benefits were 1.64% of payroll. Then benefits plummeted for eight years -- an unprecedented stretch in the history of the program -- before reaching 1.06% of payroll in 2000, the lowest level since 1983. For a few years, benefits rebounded, but the latest data from the National Academy of Social Insurance indicates that benefits were again at 1.06% of payroll in 2005.

There are several reasons for the decline in benefit payments since the early 1990s. A salutary factor is the significant decline in the workplace injury rate: the number of lost workday cases per 100 workers declined from 3.9 per year in 1992 to 1.4 in 2005.  But there are other sources of the decline in benefit payments, including changes in workers’ compensation statutory provisions that reduced benefits by more than 10 percent in 2004-05.

These reduction in benefits payments, and in particular the cuts in the statutory level of benefits, are surprising for several reasons. Within the last few years, evidence that permanent partial disability benefits are inadequate in several jurisdictions provided a justification for higher cash benefits, not a retrenchment in benefits.

In addition, the employers’ costs of workers’ compensation are now well below the levels reached in the early 1990s.  In 1990, for example, employers costs were 2.18% of payroll, compared to 1.7 % in 2005.Moreover, unlike much of the 1990s, when the workers’ compensation insurance industry was in dire financial circumstances, the industry was increasingly profitable from 2003 to 2005.

These recent developments present a mystery. Why have workers’ compensation benefits been declining so rapidly when there is evidence that benefits are inadequate, that employers’ costs are relatively modest compared to expenditures some 15 years ago, and that the workers’ compensation insurance industry is thriving?
 
The Mystery Solved

How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable,
must be the truth? -- Sir Arthur Conan Doyle

After pondering at some length on the possible and impossible explanations of the recent developments, I detected the truth: there is a vast conspiracy to induce a federal take-over of the workers’ compensation system. While I am not privy to the precise design of the proposed federal system, it appears that the plan is to have the Social Security Disability Insurance (SSDI) program take over most of the responsibility for cash benefits for disabled workers and to have Medicare assume responsibility for the medical benefits. What may appear improbable, even absurd, initially is upon careful analysis the only conceivable explanation of a series of related developments.

The Primary Evidence

Detection is, or ought to be, an exact science, and should be treated in the same cold and unemotional manner. You have attempted to tinge it with romanticism, which produces much the same effect as if you worked a love-story
or an elopement into the fifth proposition of Euclid. -- Sir Arthur Conan Doyle

You deserve, dear reader, the evidence that supports the detection of a grand conspiracy to transfer control of the workers’ compensation program from the states to the federal government.

Who Provides Benefits for Work-Related Disability? What most persons probably know is that the Social Security Disability Insurance (SSDI) program provides more cash benefits to disabled workers and their dependents than does the workers’ compensation program. And many persons probably realize that Medicare pays more for medical and hospital care for disabled persons under 65 than workers’ compensation does for all beneficiaries. These figures indicating the greater expenditures the Federal programs than workers’ compensation on disabled workers and their families may not be surprising since workers’ compensation payments are limited to those with work-related injuries or diseases, while the SSDI program compensates for disability regardless of the source of the injury or disease.

Some disabled workers -- those with work-related injuries or diseases that result in permanent disabilities -- may qualify for both workers’ compensation and SSDI benefits. Congress has long been concerned about the relationship between workers’ compensation and the SSDI program. The payment of SSDI and workers’ compensation benefits has been coordinated since 1965. Specifically, if a person is receiving both SSDI and workers’ compensation benefits, the combined benefits are limited to 80 percent of the claimant’s pre-injury wages. Federal law provides as a "default" that SSDI benefits are reduced or "offset" in order to achieve the 80 percent limit, and so in most states workers’ compensation is the primary payer of benefits for disabled workers who qualify for benefits from both programs.

Given this federal "offset" policy, it may surprise many persons (including Congressmembers) that the SSDI program provides more benefits to seriously disabled workers whose disabilities were work-related than do workers’ compensation programs.  Reville and Schoeni (2003/2004, Table 6) report that among the disabled population aged 51 to 61 who reported that their disability was work-related, 29% were currently receiving SSDI benefits while only 4.5% were currently receiving workers’ compensation benefits and only 12.3% had ever received workers’ compensation benefits. Although the results have only recently been published, the survey producing these results was conducted in 1992. Apparently because the extent of Federal underwriting of workplace disability was not then enough to induce a Congressional response, those bent on shifting control of workers’ compensation away from the states decided to press on with their conspiracy.

Further Shifts in the Costs of Disability

Spieler and Burton (1998) identified several approaches that states have adopted since the early 1990s to limit eligibility for workers’ compensation benefits. Some states explicitly limited the compensability of claims involving particular medical diagnoses, such as injuries caused by repetitive trauma or noise-induced hearing losses. A number of states also limited coverage when the injury involved aggravation of a pre-existing condition.

Traditionally, employers were required to "take workers as they found them." States restricted compensation of  preexisting conditions in avariety of ways, of which the most significant change was to deny compensation if the latest workplace injury is not the sole or major cause of disability.

In addition, there have been procedural and evidentiary changes in claims processing that have restricted compensability. For example, some statutes now require that the medical condition caused by a workplace injury be documented by "objective" medical evidence. This requirement excludes claims based on subjective reports of patients that cannot be substantiated by objective evidence, including musculoskeletal injuries that involve soft tissue damage.
 
The effects of these changes in compensability rules were significant. Thomason and Burton (2001) estimated that changes in the Oregon workers’ compensation statute, including the requirement that the current workplace injury be the "major contributing cause" of the worker’s disability, resulted in a reduction of employee benefits (and employer costs) of about 20% to 25%. Moreover, the incidence of these reforms has disproportionately fallen on older workers (Burton and Spieler 2001), since they are more likely to be disabled by a medical conditions that cannot meet the higher compensability standards.

Burton and Spieler (2001) suggested that one of the possible consequences of restricted access to workers’ compensation benefits is that disabled persons will be more likely to apply for SSDI benefits. Sengupta, Reno, and Burton (2007) noted that many who receive DI benefits have impairments associated with aging. They also noted that during the last 25 years the payments for workers’ compensation and SSDI had opposite trends: for example, as workers’ compensation payments declined as a share of covered wages in 1992-2000, SSDI payments rose. These opposite trends led them to "raise the question of whether retrenchments in one program increase demands placed on the other, and vice versa." Preliminary evidence from Burton and Guo (2006) provides part of the answer: between 1985 and 1999, those states that imposed the greatest tightening in their workers’ compensation eligibility rules experienced the most rapid increase in applications for DI benefits.

What better way to catch the attention of federal officials and Congress and to cause them to look askance at workers’ compensation programs than to systematically constrict eligibility for workers’ compensation benefits and as a consequent to shift costs of workplace disability to the Social Security program? While recent discussions of the financial problems for the cash benefits provided by the Social Security program have focused on Old Age benefits, there are even more serious funding problems with the SSDI program. So the cost-shifting strategy is a clever adaptation of the  kick-sand-in-the-bully’s-face-to-see-if-you-can-provoke-a-fight strategy.

Second-Injury Funds

The campaign for a federal take-over of workers’ compensation is not confined to such blatant tactics as denying benefits to injured workers.  Consider the more sophisticated ploy involving an assault on second-injury funds. 

Long ago, Larson and Burton (1985, 122-23) explained the rationale for second-injury funds. The funds are used to provide workers’ compensation benefits to a worker with a prior impairment who uffers one or more subsequent injuries.  These funds are designed to eliminate discrimination against handicapped or previously impaired workers.

The funds attempt to accomplish this by shifting to the fund some or all of the costs of providing such workers with benefits that would not have been incurred but for their preexisting impairments. For example, a one-armed man who is hired and then loses the other arm in a work-related injury would be totally disabled.  Under normal principles of workers’ compensation law, and in the absence of a second-injury fund, the employer would be liable for permanent total disability benefits, even though another worker who suffered the loss of one arm would be entitled only to permanent partial disability benefits. Because of this potential extra cost, an employer might hesitate to hire a handicapped worker.  The second-injury fund removes at least part of the economic motivation for discriminating against such applicants by paying the difference between the cost of all of the consequences of the injury actually incurred and the cost of that injury had there been no prior disability.

The second-injury fund principle recognizes that the full cost of disability sustained by the previously handicapped person should be borne by the workers’ compensation program but attempts to distribute equitably the burden by spreading the extra costs incurred as a result of the prior impairment rather than let them fall on the last employer.  The funds thus attempt to reconcile in part the view that "the employer takes the worker as he finds him," with the notion that the employer should not have to shoulder the full burden of certain defined losses which ought to be more broadly distributed.

This rationale for second-injury funds was so persuasive that every state had enacted such a provision by 1980.  However, beginning in the early 1990s, the workers’ compensation insurance industry took the initiative in persuading states to repeal their second-injury funds.  One reason was provided by Thompson (1995, I-114 and I-120).

But while Second Injury Fund provisions may have initially operated to encourage the hiring of the handicapped, these laws have been supplanted by more recent federal and state enactments.  At the federal level, employment discrimination against individuals with disabilities is prohibited by the Rehabilitation Act of 1973 and the Americans with Disabilities Act of 1990.

When one raises today the issue of either federal or state laws operating as an inducement to encourage employment of the handicapped, the subject of state Second Injury Fund laws would rank well near the bottom -- if even recognized at all -- on the majority of employers’ radar screens. Federal laws -- most notably ADA -- and state laws prohibiting discrimination in employment practices are far more prominent vehicles operating to preclude employers from discriminating against handicapped workers.  Based on these legislative enactments, it can be concluded that Second Injury Funds are no longer a significant influence for purposes of hiring and/or retaining disabled persons.

One problem with this analysis was that as of 1995, there was no research on the effect of the Americans with Disabilities Act on the employment of disabled persons, and so the argument was evidence-impaired. Since 1995, there have been numerous studies of disabled workers. One review of the evidence (Burkhauser and Stapleton 2003, 373) summarizes the generally accepted conclusion: The employment rate for working-age adults with disabilities, broadly defined, had declined during the 1990s, both absolutely and relative to the rate for those without disabilities.

As to the causes of the deterioration in the labor market status of adults with disabilities, Burkhauser and Stapleton (2003) recount a debate between (1) those who argue that easing of eligibility rules and increases in replacement rates in the SSDI and Supplemental Security Income (SSI) encouraged disabled persons to withdraw from the labor force and (2) those who argue that the added burdens imposed on employees by the ADA resulted in fewer job opportunities for disabled workers. There are some scholars (including Kruse and Schur 2003) who argue that the ADA is not a cause of the decline in employment rate for adults with disabilities in the 1990s, but they probably represent a minority opinion among scholars.  As a result of the extensive research on this topic, it is almost impossible to argue today that second-injury funds are unnecessary because the ADA and other laws preclude discrimination against handicapped workers.

The argument used by the insurance industry against second injury funds has thus shifted, as illustrated by this argument by Steve Schneider, Vice President of the American Insurance Association (Schneider 2007): Abolishing the Second injury Fund would not impact the amount of benefits that any injured worker will receive. It simply means that going forward all benefits will be internalized to employers and their workers’ compensation insurers, instead of being ‘socialized’ throughout the marketplace via a catch-all pool.But wait, I thought that pooling of risks was an essential feature of insurance. Are reinsurance agreements
commonly used by insurance companies inappropriate because they "socialize" risks throughout the marketplace rather than internalizing the risks to individual carriers? And what about the other side of requiring employers and their insurers to internalize benefits: won’t that encourage employers to discriminate against workers with previous impairments?

The use of such arguments to abolish second injury funds -- that ADA and similar laws take care of the discrimination problem and that ending the funds will end "socialized" benefits -- have persuaded at least 19 states to abolish their funds since the early 1990s. However, I think these arguments are not the true explanations for the campaign to eliminate second injury funds.

A plausible alternative explanation is that the elimination of second injury funds is part of the general strategy to tighten eligibility standards for workers’ compensation benefits that has been in pursued since the 1990s. The explicit idea of second injury funds is that a worker with a prior impairment should receive full workers’ compensation benefits if he or she has a subsequent injury that results in an unusually severe disability. However, such a principle is incompatible with the new standard for compensability: that the current workplace injury must be the major contributing cause of the resulting disability. And in order to carry that new standard to its logical conclusion, the abolition of second injury funds is necessary.

That explanation, though plausible, is not the actual explanation for the demise of second injury funds. Rather, the reason is this.  Second injury funds historically have been a distinctive attribute of workers’ compensation programs that promotes the hiring of handicapped persons. As such, a federal takeover of workers’ compensation programs with second injury funds would undercut an important national policy, namely the employment of disabled workers. However, if second injury funds are all abolished, then this argument cannot be used to fend off federalization. Thus, the reason for the campaign is clear: get rid of the funds in order to remove an obstacle to federalization.

That the crusade to abolish second injury funds is being carried out in order to facilitate federalization of workers compensation receive further credence from the history of these funds. They largely were enacted during and shortly after World War II as a way to protect disabled war veterans when they returned to the labor market.  We are currently engaged in a military operation that is resulting in a surge of disabled veterans. What better way to ensure hostility towards state workers’ compensation programs than to provoke the Veterans’ organizations into frenzy by eliminating second injury funds?

Integrated Cash Benefits and Medical Care

One argument that has been made to preserve the current design of workers’ compensation concerns the combination of medical care and cash benefits in one program.  When the national health care plan was introduced early in the First Clinton Presidency, one feature was that the health care for workplace injuries would have been folded into a general health care system, leaving the provision of cash benefits as the primary role for workers’ compensation.

There was a strong condemnation of this plan from workers’ compensation insurance carriers, who asserted that cash benefits would skyrocket unless the medical and rehabilitation aspects of claims could be managed so that extra services could be provided to expedite return to work.

This justification for an integrated system of cash benefits and health care has been undermined, however, by research in recent years involving other countries.  The Ontario Workplace Safety and Insurance Board, for example, purchases medical care for workplace injuries and diseases from the province’s publicly funded health care system care system rather than operating a separate medical system for the workers’ compensation program (Mustard and Sinclair 2005). Despite this separation of the cash benefits and medical care components of the treatment of disabled workers, Thomason and Burton (2001b) found that, in comparison to most U.S. jurisdictions, Ontario provided higher workers’ compensation benefits, lower medical costs, and insurance costs that were equal to or lower than the median cost jurisdiction in the U.S. While these well-meaning researchers may have been unaware of all the implications of their results, I discern further evidence of the plot to shift the U.S. workers’
compensation program to the Federal government and to assign the cash benefits to the SSDI program and the medical benefits to Medicare.

Workers’ Compensation and Safety

A distinctive feature of workers’ compensation is the use of experience rating to determine the insurance premiums paid by employers. This is in sharp contrast to the SSDI program, which relies on a tax on employers and workers that does not vary among firms on the basis of DI benefits paid to former employees. Experience rating was a feature of the oldest state workers’ compensation program in the U.S., namely the Wisconsin program enacted in 1911. Experience rating was included because of the influence of John R. Commons, Professor at the University of Wisconsin and the first Chairman of the Wisconsin Industrial Commission.  Commons advocated experience rating because he espoused a theory that tying employer premiums to previous benefit payments would induce employers to improve safety in order to cut their insurance costs.  However, Commons may have been guilty of violating one of the precepts of our mentor for the day.

It is a capital mistake to theorize before one has data -- Sir Arthur Conan Doyle

Unfortunately, there does not appear to have been many (any?) empirical studies of experience rating relying on actual data published in the first half-century of the workers’ compensation program.  When the National Commission on State Workmen’s Compensation Law published its report (1972, 96-97), it provided a primitive test of the effect of experience rating by comparing average benefits per case with the injury frequency rate for some 15 states.  The conclusion: There does not appear to be a systematic relationship . . . between the level of benefits and the safety record in the State. These data suggest again that workmen’s compensation insurance rates are not the strongest force affecting the frequency of accidents.

Fortunately, there has been a plethora of research on the issue of whether experience rating promotes workplace safety in the last 30 years.  Unfortunately, the scholars who have conducted or surveyed this research disagree on the proper interpretation of the results.  In one camp (in which I reside), there are the believers who agree with Thomason (2003, 196) when he asserts: "Taken as a whole, the evidence is quite compelling; experience rating works." In another camp are the agnostics who agree with Boden (1995, 285) when he concludes: "research on the safety impact has not provided a clear answer to whether workers’ compensation improves workplace safety."

Do these agnostics realize the implications of their viewpoint and, if so, are they part of the federalization conspiracy? Some argue that the main justification for a separate disability program for workplace injuries is the promotion of workplace safety, and if this justification is lacking, then it makes sense to end a separate program that devotes a considerable amount of resources to deciding whether a particular worker’s disability is due to workplace exposures.  And if you follow this trail of compelling logic, then the case for federal programs for disabled workers that drop the work-related test for benefits is equally compelling.

The Secondary Evidence

The preceding section provided the primary evidence supporting my unmasking of a vast conspiracy to induce a federal take-over of the workers’ compensation system and to have the Social Security Disability Insurance (SSDI) program take over most of the responsibility for cash benefits for disabled workers and to have Medicare assume responsibility for the medical benefits.  But there is secondary evidence that supports my insights and imagination, and again we turn to our teacher for the value of such evidence:

It has long been an axiom of mine that the little things are infinitely the most important -- Sir Arthur Conan
Doyle

Termination of Department of Labor Publications

The U.S. Department of Labor has a long history of issuing publications that support state workers’ compensation programs.  For many years, the Department of Labor published the annual proceedings of the International Association of Industrial Accident Boards and Commissions (IAIABC).  And beginning in the 1970s, the Department of Labor annually published State Workers’ Compensation Laws and State Workers’ Compensation Administration Profiles, which are crucial compilations of information.

The Department of Labor terminated these publications after the 2006 editions. Shelby Hallmark, director of the Office of Workers’ Compensation Programs, indicated the termination decision was made because of budgetary constraints and the retirement of Glenn Whittington, the person primarily responsible for the publications in recent years.  While that explanation is plausible, there is an alternative and more attractive explanation.  Why waste resources documenting the myriad differences among the state workers’ compensation when there will soon be a federal program with uniform provisions for all states?

The AFL-CIO

The national AFL-CIO has a long history of providing assistance to state affiliates concerning reforms of state workers’ compensation programs. Jim O’Brien, for example, was a member of the National Commission that in its 1972 report supported federal standards for a state-run workers’ compensation program rather than a federal take-over of the area.  And in the last decade, Jim Ellenberger and Rob McGarrah were the AFL-CIO stalwarts who inter alia were the national experts in the labor movement who counseled union leaders at the state level about the desirability (or lack thereof) of various proposals for changes in state workers’ compensation laws.

The AFL-CIO recently decided to eliminate the position for the staff member providing guidance to state-level union officials about workers’ compensation developments.  The public explanation was that the fissure in the labor movement -- which resulted in several unions withdrawing from the federation -- necessitated staff cuts because of budgetary constraints.  Surely you will recognize this as a ruse.  The real reason surely must be that the AFL-CIO recognizes that federalization of workers’ compensation is inevitable and has decided to "throw in the towel" on the futile effort to shore up the state-based workers’ compensation system.

What About Contrary Evidence?

I recognize some sotted and sordid skeptics will think of examples from the recent history of workers’ compensation that appear to contradict the revelation of a conspiracy to shift workers’ compensation to the federal government and to allocate the components of workers’ compensation to the SSDI and Medicare programs.  But I take comfort from  the guidance of my primary mentor concerning such examples (which allows me to discard conflicting evidence):

I ought to know by this time that when a fact appears opposed to a long train of deductions it invariably proves
to be capable of bearing some other interpretation -- Sir Arthur Conan Doyle
   
Lamentations

Outing a conspiracy is always a conflicting experience. What were John Dean’s emotions when he testified about the Nixon Administration’s involvement in the Watergate break in? Should my revelation of the conspiracy to federalize the workers’ compensation be a source of pride -- since I have solved an intriguing puzzle -- or a source of despair -- since I have long been a supporter of state-based workers’ compensation program? Here I turn to another mentor to capture my emotions.

All my joys to this are folly, Naught so sweet as Melancholy -- Robert Burton

Coda

The esteemed Editor of the IAIABC Journal, Robert Aurbach, had the audacity to ask me to provide documentation of
the vast conspiracy to induce a federal take-over of the workers’ compensation system.  My initial reaction was to
turn for guidance to still another mentor:

I can say no more than I have said already. Everything that I can remember, I have told with perfect candour. 
Nothing has been distorted or concealed, and if anything remains vague, it is only because of the dark cloud which
has come over my mind – that cloud and the nebulous nature of the horrors which brought it upon me. -- The Statement of Randolph Carter H. P. Lovecraft

All right, all right. That did not satisfy the probing inquiry of the Editor. And so I confess that -- as far as I know -- the notion of a vast conspiracy is fiction. I also confess that the true explanation of the recent reforms of state workers’ compensation laws was developed at some length in an earlier article (Burton 2006a, 28): Why have we now reached a stage where emphasis on reforms of state workers’ compensation programs that reduce costs raise the specter of federal reforms that jeopardize the future of the state-based workers’ compensation system?

As you might anticipate, my answer is: myopia.

But there are shades and degrees of myopia, and my perception is that myopia is more prevalent now than when the National Commission issued its report a third of a century ago.

Why is there more myopia?  Part of the explanation is the greater emphasis on short-term profits by corporate leaders in recent years. Another reason for the myopia appears to be the lack of leadership within the workers’ compensation insurance industry.

This article has thus provided two possible explanations of many of the recent reforms in state workers’ compensation programs: they are part of a deliberate conspiracy to provoke a federal take-over of the programs, or they are the result of myopic choices that will provoke a federal take-over of the programs.

Which explanation do you prefer?

John F. Burton is professor emeritus at Rutgers University and a board member of the National Academy of Social Insurance. This copyrighted opinion column was reprinted with his permission and permission of the IAIABC Journal, where it originally appeared.