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Home / Washington Business - May/June 2004 / Unreformed Workers' Compensation System Poses Threat to Jobs Statewide |
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Unreformed Workers' Compensation System Poses Threat to Jobs Statewide |
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Written On: May/June 2004 |
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Written By: by Richard S. Davis - President, Washington Research Council |
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Those River City residents could have been discussing workers’ compensation. After years of analysis and negotiation, essential reforms died in the Legislature because antagonists could not agree on the extent of the problem. Meanwhile, employers remain hampered by uncompetitive costs that inhibit job creation and increase the possibility of additional layoffs.
Opponents of reform downplay the magnitude of the problems, saying “low costs” here provide a competitive advantage to Washington employers.
Each side points to evidence in support of its position. One side has to be wrong.
In a recent report (Washington’s High Benefit – High Cost Workers’ Compensation System, available on AWB’s Web site), the Washington Alliance for a Competitive Economy cuts through the statistical tangle to make clear that the state’s workers’ comp system imposes high costs that threaten job creation and investment here.
Reforms Must Address Program Administration and Benefits
The system’s troubles begin with extraordinarily high benefits which grew rapidly in the mid and late 1990s, propelled by automatic cost of living adjustments, an increase in the maximum monthly benefit to 120 percent of the state’s average wage (the third highest wage replacement benefit in the nation), and medical inflation. Unsustainable investment earning in the 1990s allowed the state to handle the steadily increasing benefit levels without boosting premiums. Self-insured employers felt the impact immediately; those participating in the state fund were hit a little later.
Beginning in 2000, the system faced twin perils: A portfolio hammered by the market implosion and a spike in benefits due to a pair of state Supreme Court decisions. Premium increases followed quickly. High benefits always mean high costs. In 2003, the state’s Department of Labor and Industries (L&I) raised workers’ compensation premiums 29.5 percent. In 2004, L&I sought a 19.5 percent premium hike, rolling it back to 9.8 percent after protests. And they’ll seek a double-digit rate increase in 2005.
In 1998, the last year for which comprehensive national data were available, benefits paid in Washington were about 19 percent higher than the national average, and well above the levels paid in three-quarters of the states.
According to the National Academy of Social Insurance, between 1997 and 2001 overall benefits here grew by 35 percent, compared with a national growth rate of 17 percent (excluding federal programs). Our state fund benefits grew by more than 28 percent; state funds across the country saw benefit growth of just 9 percent over the period. And self-insured employers here shouldered benefit growth of 51 percent, while self-insured firms nationally experienced a growth rate of only six percent.
Adjusting for economic differences among the states, Washington grew more than 10 times faster than the US average.
And this is before the courts applied topspin. In 2000, the state Supreme Court found that benefits for seasonal and intermittent workers cannot be adjusted to reflect their employment history if the worker’s “intent” was to work year round, making it possible for some people to make more in workers’ compensation benefits than they earned on the job (the Avundes decision). In 2001, the court said that employer contributions to health insurance had to be included in the wage calculation for benefits, dramatically increasing costs.
Does it matter? What about the boast that Washington has done the unimaginable, coupling high benefits with low costs?
Well, of course it matters. The high benefit / low cost assertion is a fiction.
Most national studies comparing workers’ compensation premiums exclude Washington because the state does not calculate premiums the way everyone else does. L&I calculates premiums on the basis of the number of hours an employee works; the rest of the country calculates premiums based on dollars of payroll. And because we don’t have a private insurance market, there’s no national marketplace to help sort out the differences.
Defenders of the status quo hang their arguments on a study conducted routinely by Oregon’s L&I counterpart. They give it more weight than do the Oregon researchers themselves. In a four-page discussion of methodology, the Oregon analysts point out that the study is weighted by industry to reflect Oregon’s economy and does not include self-insured employers. Further, “the results might be substantially different” if different classes were selected or payroll from another state was used for weighting the rates. Compounding the usual comparability problems was a special complication: “The Washington payroll data included overtime pay, which may overstate the average wage for purposes of premium computation, and thus understate the effective average payroll rate.”
In sum, the Oregon study, while possibly useful for that state’s internal benchmarking, has no value for policymakers interested in assessing the performance of Washington’s workers’ compensation system. Worse, by showing implausibly low rates for Washington, it damages efforts to achieve meaningful and overdue reform here.
Over time, the benefits paid by the workers’ compensation system are the costs of the system. While premiums may be suppressed temporarily by using reserves, or extraordinary investment returns can be used to mask the costs of escalating benefits, eventually the costs will be passed on to the employer. If the benefits here are among the nation’s highest — and no one disputes that they are — system costs, too, are correspondingly and uncompetitively high. To bring them in line, next year’s Legislature must get a grip on uncontrolled benefit increases.
Administrative issues, too, must be addressed. Fluctuating reserves contribute to rate volatility. A consistent reserve policy will make system costs more transparent and avoid the problems arising from premium hikes that both replenish depleted reserves and pay for prospective costs. Efforts to improve program administration and fraud prevention have begun to pay off, both for injured workers and their employers. The work must continue. Accelerating the return of injured workers to the work place requires continual improvements in vocational rehabilitation programs. At the same time, the department must strengthen its efforts to curb abuses in retraining programs. And, certainty must be restored to the process by making the appeals process more rational and decisive. Washington provides more levels of review than most states, including an appeal to the Superior Court that needlessly increases the costs of all stages in the dispute resolution process. That final, costly appeal should be eliminated.
Over the next few months, business and labor representatives will attempt to negotiate system reforms, with the goal of bringing a compromise to the 2005 Legislature. Ideally, they’ll see eye-to-eye and embrace reform. We can no longer afford the stalemate.
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