Breaking the Gridlock
Saturday, July 28, 2007 | 0
By Bob Briscoe and Bob Meyer
On March 13, 2007, New York Gov. Eliot Spitzer signed into law what most agree are the most significant reform measures to the New York Workers' Compensation Act in decades. After years of discussions, but continued inaction on the part of the legislature, the New York State Business Council and the state AFL-CIO earlier this year agreed to a series of reforms intended to reverse the high cost of the New York Workers' Compensation System.
For years now it has been widely understood that despite having among the nation's lowest maximum weekly benefits, workers' compensation costs for New York employers were among the nation's highest. In most states, the maximum weekly benefit automatically increases as the state average weekly wage increases. In New York, specific legislation had to be passed each time benefits were raised. New York's $400 maximum weekly benefit had been in effect since 1992. Only four U.S. jurisdictions had a lower maximum weekly benefit.
With such low weekly benefits and general consensus that workers' compensation claims frequency has been declining nationwide for five or more years now, why then have employer costs in New York been so high? The answer lies in the lifetime duration of nonscheduled permanent partial disability, or NS PPD, claims.
NS PPD claims are primarily soft-tissue injuries involving pain to the back, neck, knees or shoulders. New York was one of only a handful of states that, until recently, had no limit on the number of weeks an injured worker could receive NS PPD benefits. In New York, NS PPD benefits account for less than 10% of the number of claims and 75% of the indemnity claim costs. The ultimate cost of the indemnity portion of NS PPD claims ranges from $300,000 to more than $500,000, depending upon the weekly benefit awarded and the claimant's age. In other states, indemnity claim costs of this magnitude are almost always only provided to those who are permanently and totally disabled.
A "swap," which limits the duration of NS PPD benefits while increasing the maximum weekly benefit, was discussed in Albany numerous times in the past. Previously, this swap concept never advanced due to the lack of a credible estimate of the opposing cost impacts. The Spitzer administration refined the swap concept, proposing to increase the $400 maximum weekly benefit in increments ($500 on July 1, 2007, $550 on July 1, 2008, $600 on July 1, 2009, and two-thirds of the statewide average weekly wage on July 1, 2010).
In exchange for this benefit increase, the new law places caps on the duration of NS PPD claims occurring on or after March 13, 2007. The duration of a NS PPD award is now a function of the disability percentage ranging from 225 weeks for 15% or less disability to 525 weeks for more than 95% disability.
As was the case with the prior administration, costing the swap was dependent upon a credible demonstration that sufficient savings from the capping process would emerge to more than offset the costs from the maximum benefit increases.
Key to Costing the Swap: Data
Established in l914, New York's Workers Compensation Act is the oldest in the nation. Thanks in large part to law amendments and case law that have developed over nearly a century; it is also one of the most complex.
As in most states, there are four types of lost time claim categories in New York resulting in wage replacement benefits:
1. Temporary total and temporary partial, or TTD and TPD, paid while a worker is recovering from an injury
2. Scheduled and nonscheduled permanent partial, or PPD, for those with an ongoing partial disability
3. Permanent total, or PTD, for those totally disabled
4. Death
Who gathers industry data at this level of detail? Insurance rating bureaus collect data and provide statistics by state on the average claim frequency and average claim cost per type of lost time claim. They also collect statistics on medical and other insurance related system costs. Ratings bureaus collect these and other financial aggregate data from insurance companies to determine benchmark manual rates or loss costs that vary by employment classification. Workers' compensation rates or loss costs are calculated by estimating system costs per $100 dollars of payroll. Indemnity, medical and expense dollars are analyzed separately. While claim costs are analyzed by type of lost time claim, average weekly wages of claimants are not normally captured.
Many states' workers' compensation agencies collect certain data that can help provide a more complete picture of the state's underlying costs. However, most states' agencies only collect data on litigated claims. This means that if a claim is paid voluntarily, the state will not have captured either the loss or wage data on that claim. This was the case in New York prior to l999. At that time, the New York Workers Compensation Board began gathering loss and wage data on every indemnity benefit transaction on every claim in the state including data on paid indemnity benefits not involving litigation. This would include private carriers, the New York State Insurance Fund and self-insurers.
First the Swap
Rough estimates for New York suggest that private carriers comprise 45% of the statewide market, NYSIF 30% and self-insurers 25%. The New York Compensation Insurance Rating Board collects rate-making data from all insurance companies including NYSIF, but does not collect rate-making data from New York self-insurers. Insurance rate-making data could not, therefore, lead to a complete evaluation of the effects of the swap on all employers in the state.
The WCB provided us with a transactional database of all lost time claims in New York with accident dates between 2000 and 2004. Since this database encompassed claims throughout the state, it included private carrier, NYSIF and self-insured claims. The database also included wage data for each claimant.
Our first step was to determine what the cost of indemnity benefits, by type of lost-time claim, would have been had the claims in the database occurred during 2007. To do this, we adjusted all wages in the database to the 2007 wage level assuming a 3.5% annual wage inflation.
We then isolated the NS PPD claims and valued these claims for the life of each claimant using the 2007 inflated weekly wages and the disability rating percentage from the WCB database, which could resulted in a statewide system savings of $882 million after superimposing certain proposed duration limits.
Indemnity benefits for all other lost time claims were determined, first using the current limit of $400 per week and then using the proposed $500 per week limit. This resulted in additional statewide costs of $187 million. The net savings of $695 million ($882 million less $187 million) from indemnity benefits was then combined with reforms intended to streamline medical treatment, enhance return-to-work programs, and strengthen anti-fraud measures to produce an overall statewide system savings in the range of 10% to 15%.
Our analysis of the swap brought to light several reasons why indemnity costs in New York have historically been higher compared to other states. One reason, aside from the lifetime duration issue discussed earlier, pertains to a subtle difference in the formula used in New York to determine the NS PPD weekly benefit compared to the formula used in other states. The example that follows shows this subtle difference and the effect it can have on the resulting weekly benefit.
State X NS PPD Weekly Benefit = [{66.7% of Average Weekly Wage} limited by Maximum Weekly Benefit] x Disability Rating
New York NS PPD Weekly Benefit = {66.7% of Average Weekly Wage x Disability Rating} limited by Maximum Weekly Benefit
Let's assume an Average Weekly Wage of $1,500, a Disability Rating of 50%, and a Maximum Weekly Benefit of $700 in State X and $400 in New York. Despite the higher Maximum Weekly Benefit in State X, the actual weekly benefit in New York is $400, greater than the $350 for State X.
New York's NS PPD benefits are, therefore, higher for similar claimants with similar disability percentages and will remain so even after the recent reform.
As with any other state, impairment and loss of earning capacity is determined when the claimant has reached maximum medical improvement. Historically, disability ratings in state workers' compensation systems have been determined by informal or formal litigation, sometimes from widely differing physician reports submitted by claimants and employer/insurer-hired doctors. Since the mid-1990s, many states have enacted statutory mechanisms that require the use of standardized range-of-motion measurements for determining disability ratings.
The New York Workers' Compensation System relies on subjective ratings criteria by incorporating an informal process that arrives at a rating using terms such as mild, moderate, marked, etc. These terms indicate a range of possible disability percentages determined mainly by the parties involved agreeing on a specific weekly benefit. As a result of the new law, agreement will need to be reached on specific disability percentages. The new specific percentages will determine the NS PPD benefit duration. Historically, the distribution of NS PPD ratings in New York is significantly skewed to the right; while most states have a peak at between 10% and 15%, New York's peak is closer to 50%.
Second Injury Fund Closure
There is yet another reason New York's system has been so costly: New York's Special Disability Fund, commonly referred to as the Second Injury Fund or Section 15-8 Fund. After World War II, there was a concern that employers may discriminate in offering employment to wounded war veterans due to the heightened potential for very serious workers' compensation claims when work-related disabilities were combined with war wounds.
A total of 38 states established SIFs in the post World War II era. Over time, these funds evolved into mechanisms to reimburse employers for workers' compensation claims arising from the combination of a work-related injury and a previous disability--be it work-related or not. While most state second injury funds including New York's required that the employer know of the first injury at the time of hire, many including New York, dropped that requirement greatly expanding the scope of the funds. New York dropped this requirement in 1984.
While the establishment of SIFs at the time appeared prudent, it proceeded from what is now a flawed concept. At the time that SIFs were set up, most workers' compensation benefits covered graphic injuries in which claimants lost fingers, arms, toes, legs, or the sight in one or two eyes. Relatively little compensation was paid for soft-tissue injuries to backs, necks, shoulders or knees. Since the 1970s, however, workers' compensation benefits have shifted toward soft-tissue injuries, with most current workers' compensation costs associated with back, shoulder, neck and knee pain. SIFs adapted to this change by accepting prior medical conditions other than graphic injuries again greatly expanding the scope of the funds. During a period when many states were abolishing SIFs, New York's SIF continued to accept more and more expensive lifetime benefit claims.
The combination of increasing requests for reimbursement from SIF coupled with an annual pay-as-you-go funding mechanism, albeit an expensive one (currently at an assessment rate of 18.6% of standard premium for private carriers), has resulted in a significantly underfunded second injury fund. SIF establishes approximately 4,300 claims each year. Approximately $500 million is collected annually from private carriers, NYSIF and self-insurers; a near equal amount is disbursed annually. SIF has been a significant contributor to the high cost of the New York workers' compensation system though its high assessments.
With this reform, the New York legislature has decided to close down SIF for claims with an accident date after July 1, 2007. Further, no new requests for benefit reimbursements on accidents occurring prior to July 1, 2007, will be accepted after July 1, 2010. Since SIF was never financed on a fully funded basis but rather by a pay-as-you-go basis, the closure should improve the state's business climate. We expect, however, it will be many years before the assessment is significantly reduced.
Few states have enacted such a wide-reaching reform to their workers' compensation law--in part because of a lack of credible data that incorporated both actual claimant wage data and self-insured claims. Florida and Texas enacted sweeping law changes in the 1990s but the general direction of almost all of the changes reduced benefit amounts, as well as the duration of such benefits. California recently limited the duration of its high-cost PPD benefits, without significantly increasing average weekly benefit amounts. This reform in New York balances the long-awaited increase in the maximum weekly benefit with the need to place duration limits on NS PPD benefits.
Now if New York could only find a way to fix the midtown Manhattan gridlock. That would be an accomplishment!
Robert K. Briscoe and Robert J. Meyer, FCAS, are principals and senior consultants with Milliman. They each have extensive experience consulting on workers' compensation assignments, and both served as advisors to the state of New York on the recent reform to New York's Workers' Compensation Law. This column first appeared in Risk and Insurance. The Web site can be found at http://www.riskandinsurance.com/.
-------------------------------
The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.
Comments