The Evolution of Comp; Work-Injury Insurance

Wednesday, December 17, 2008 | 5

By David J. DePaolo

These are historic times. We have a black president for the first time in this nation's history. We are facing economic peril the likes of which have not been present since the Great Depression. The threat to international security has never been higher with terrorists, pirates and drug lords waging guerrilla warfare on civilization.

Amid this challenging news, we face huge socio-economic change. Industrialization, which has been waning in America for years, threatens to come to a grinding halt with the demise of the automobile manufacturing business. Fewer and fewer people have medical protection. More and more people are facing financial ruin.

Without burdening you by making observations of the obvious (indeed, our general newspapers are replete with daily reminders) life in the United States is undergoing fundamental change.

And with it too, so should what we euphemistically refer to as "workers' compensation?"

As you likely know, workers' compensation's historical roots are in the change from an agrarian society to industrialization where the risk of daily living evolved from living off the land and the unpredictability of farming, to mechanized factory hazards. In the past couple of decades another shift has evolved, from industrialization to "informationalization," where the value of a worker lies in his or her skills to leverage knowledge. Even factory workers are not so valued for bolting parts together as they are for operating sophisticated machinery and robots.

Indeed,  society's laws have mirrored this shift: those with disabilities are protected from discrimination by the Americans with Disabilities Act and the Fair Employment and Housing Act; those that need time off to care for those injured or sick are protected by the Family Medical Leave Act; medical privacy is protected through the Health Information Portability and Protection Act.

Workers' compensation laws, too, have changed. As recognition that knowledge workers face risks, injuries and disabilities different than our predecessors from occupational hazards (stress versus concussion, carpal tunnel syndrome versus lost phalange, toxic exposure versus coal miner's disease, etc.) protections from liberal legislatures and the courts expanded. In reaction to overzealous access to these expanded protections, conservative legislatures - and ultimately regulators - reacted with increasing restrictions. The inevitable wax and wane of trends has over time cumulatively produced ever greater labyrinths of legal morass proving more and more ineffective at delivering on the promises of workers' compensation's original intent to the ultimate stakeholders: prompt, efficient, effective medical treatment and financial protection to workers in exchange for a stable and predictable legal and fiscal environment.

To highlight the ineffectiveness of modern day workers' compensation systems, a recent study conducted by the University of California Data Survey Center on behalf of the Commission on Health, Safety and Workers' Compensation (CHSWC) found that nearly 10% of work injuries, and fully two-thirds of occupational diseases are misclassified as non-industrial, which means a disproportionate share of work-injury issues are burdening state disability and general health care.

In light of the above, America is facing a health care crisis. Fewer people have adequate (or any) health care coverage threatening a core ingredient to an essential economic assumption – sufficient healthy people to do the work of the country. This reality has been a political agenda of Democrats for the past ten years, and the GOP, as evidenced by Senator John McCain's bid for the presidency, has also voiced concern. Indeed, barring any miraculous private industry solution, it is now becoming more likely that this generation will see some form of universal health care or socialized medicine.

It is with the above assumptions that I offer the following hypothesis: that workers' compensation over the next 20 years will evolve to become a work-injury insurance plan, with the underlying medical treatment covered by the government funded by employers with worker deductibles, workers contributing to their own disability plan with options for term, rate and duration, and incentives rewarding abilities rather than disabilities, all under a system where minimums are legislatively defined but otherwise where the employment market dictates the extent of benefits provided (in other words, an employee benefit, much like health insurance or 401K is now).

The model for this evolution is present today in Texas, where successful non-subscriber employers (and their employees) enjoy faster medical treatment, less disability, and quicker return to work at a cost that is, on average, one-third less that of traditional workers' compensation. The Texas Division of Insurance reports greater employee satisfaction and employers report quicker return-to-work times. Physicians enjoy prompt payment on fair pricing and litigation is minimal. Indeed, California touches on some of these concepts with various “carve out” programs, eschewing elements of traditional workers' compensation for privatized systems based on collective bargaining agreements with labor.

Evolution means organic change over time, generally for the better. The genesis for the evolution of workers' compensation is going to be changes to the general health care system. There is no doubt in my mind that some time in the very near future nearly all U.S. citizens will be covered by some universal health care model. I do not know what it will look like, nor do I know how it will operate. But common sense based on the existing structure of health care indicates that it will be an insurance-based model generally funded by employers. In this context, then, there is no reason for workers' compensation as a medical-care delivery mechanism to exist any longer. Duplication in medical coverage is not only inefficient, but will not be tolerated by payers – i.e. the employer community.

I have offered this vision to others in the industry, and the general argument I encounter against the disembodiment of medical care from workers' compensation is that the fundamentals of the two systems are inherently different. General health care is focused on the treatment of disease and is not concerned with disability. Workers' compensation, on the other hand, is more concerned with the treatment of injury and its primary purpose is to deal with disabilities.

To this I argue that the reason workers' compensation IS so flawed is because it is in fact so wrapped up in the concept of disability – I will get to that later – and is the primary reason why the current model can not exist for much longer.

For argument's sake, let's disembowel disability from the medical component of workers' compensation – what you have left then is medical treatment for treatment's sake, unconcerned with ancillary issues. Only the practice of medicine is left. In my admittedly unsophisticated mind, physicians then do what physicians are trained to do – treat the injury or illness.

Next comes the issue of treatment for the sake of treatment, what we in workers' compensation like to refer to as "utilization". How does one control utilization (or more accurately, over-utilization)? Aside from medical treatment guidelines, or as the industry likes to call it, peer-reviewed evidence-based treatment protocol, one proven method of dealing with utilization is deductibles. All health care plans have them. There is no reason why this should not be the case for work-injury insurance. There is, of course, labor's argument that the average working person cannot afford deductibles. But, as mentioned above, first overall health care will be covered by a universal care model. If the covered injured worker through work-injury insurance desires treatment over and above what is provided through universal care (or is entitled to it), then that should be available via the work-injury insurance program. Deductibles are simply provided through the worker's work-injury health care account, into which a small percentage is contributed via payroll deduction each pay period and perhaps matched by some contributing formula by the employer.

I mentioned disability above and the issue of dealing with it. My plan: Don't deal with disability.

Why do we reward people for being disabled? Is there no better model? Why not reward people for productivity?

The issue becomes one of motivation. Some folks will be motivated to do better regardless of their station in life and others simply cannot rise above it. That is the nature of the human condition.

I posit that vocational rehabilitation, return-to-work and all other programs with the good intention of getting people back to work will eventually fail. The issue is not assisting folks to get back to work. The issue is motivating people to get back to work (or in some cases, to work at all!).

There are two methods of motivation: affirmative and negative. In the affirmative model, the incentive is a positive reward. Do something that is desired and get a reward for it. In the negative model, the incentive is punishment. Do something that is not desired and get punished for it. Rarely in legal or regulatory models are the two put together to provide a comprehensive system of reward and punishment with the desired outcome kept in focus. This is because the desired outcome in the workers' compensation system is to deal with disability. Disability, I argue, is a negative outcome. So anything that is put in place to deal with it is in itself a negative system. There is no good outcome because the ultimate focus is what a person cannot do.

So let's scrap any model of disability indemnity. The message, the motivation, the inherent conflicts are too great.

Of course, folks are going to need some subsistence while they recuperate from their injury or illness. This is what state disability is for.

But state disability provides only minimal assistance, and in a high expense state like California, is woefully inadequate and doesn't even provide poverty-level assistance. That is why work-injury insurance will provide the worker with a supplemental income benefit that is based on the amount the worker sets aside in his or her disability income insurance account with a corresponding match from the employer. The worker can define what the waiting period is, the maximum benefit, and the maximum duration. The employer can supplement the benefit as an employee recruitment incentive benefit. The minimum levels would be set by state law. The maximum levels would be the product of the employee's contribution level and employer match. All would be invested in an appropriate bond-based annuity, and upon transfer or termination of employment, the employee's fund would also be transferred or cashed out (based on age, retirement status, etc.).

What about folks that are permanently disabled? What to do with folks who can not return to their pre-injury occupation?

Nothing. Why provide incentive not to be productive? Disability compensation provides remuneration for not being able to do something.

I say provide compensation FOR being able to do something, for being productive, and make workers accountable for being productive by making them contribute to their own “productivity incentive indemnity account.”

For example, assume that the injured worker has a severe back disability and that he or she can no longer do heavy lifting or spend more than two hours sitting. Under old model workers' compensation systems, the worker would be rewarded for this disability. The incentive that is communicated is that it pays to be disabled.

Instead, let's say this worker, who used to make $25 an hour, can get a job that pays only $15 an hour. Under old models the worker would have a disincentive to take that job, because not only would it prove that the worker was not as disabled as presumed, but the amount of indemnity that would be paid would be reduced as a result of obtaining a productive level of functioning. Instead, I suggest that the worker be paid the difference in earnings for a period of time, and that if the worker gets a promotion or makes some other trip up the wage ladder that he or she be paid a bonus as a reward.

My critics will say that I am not properly accounting for the folks who cannot, or will not, re-enter the open labor market or make the efforts necessary to obtain some level of societal productivity. Perhaps they are right. I am admittedly quite naïve about personalities and psychology, and certainly there will be extreme cases of catastrophe that cannot be dealt with in this model. But the point I am making is not that I have all the answers, only that it takes some imagination and experimentation to see what works. What I do know is that rewarding people for disability does no one, and in particular the injured worker, any good.

What I am predicting is a massive paradigm shift that I believe is inevitable as a result of changes in the economy, changes in society and changes in politics that cannot be ignored. There are deep tectonic forces that are under way and workers' compensation is still in the ice ages. I am advocating scrapping the old Rooseveltian model of work-injury protection, a system that was rooted in an economy that is no longer relevant, and bringing to society a system that is more congenial with our present world: a system that is managed more like an employee benefit rather than an employment burden. Texas allows employers to design and deliver work injury-insurance systems, and when done right they are remarkably effective and efficient. It is a model whose time is only a socialized medicine/universal care plan away.

David J. DePaolo is the president and CEO of WorkCompCentral.