March 2, 2020
Threats, Openings for Workers’ Comp
What if external factors overwhelm the workers' comp system's century-old ability to balance the rights of employees and employers?
Workers’ compensation systems have been a central and meaningful part of our social safety net for over 100 years. This longevity was accomplished despite social and economic change and technology revolutions, through wartime and peacetime, economic crises, etc. Two features have been central to this enviable record of continuity. The first is a fundamental and enduring premise that workers’ compensation systems should provide a fair balance between (1) adequate income benefits and timely medical care for injured workers in their time of need and (2) an affordable cost to employers, which must compete in an increasingly global marketplace. The second feature is a robust, albeit imperfect, process for redressing significant imbalances that inevitably occur from time to time.
What does change look like? When systems stray significantly out of balance, legislators and regulators are mobilized by injured stakeholders to change the laws and regulations to move systems back toward that fundamental balance. Note that the direction is “toward” a better balance — not to some specific “ideal” definition of balance. In this context, “balance” has always been and necessarily remains an amorphous concept. Sometimes, the reform process falls short, and other times it overshoots. Having a reform process that generally moves the systems in the direction of improved balance has been one key to workers’ compensation systems’ successful adaptation to many twists and turns over the course of a century.
A few examples illustrate this. In the early 1970s, the benefits paid to workers were inadequate, according to a report by a national commission appointed by President Nixon. In the ensuing decade, legislatures in many states increased statutory benefit levels. By the late 1980s, the pendulum had swung in the opposite direction. Claims costs were rising at unsustainable double-digit rates; many elected and appointed insurance regulators were unwilling to pass these large cost increases on to their employer constituents; and the availability and affordability of workers’ compensation insurance became a serious concern. Over the next decade, many state legislatures addressed key cost drivers, deregulated insurance prices and created competitive state insurance funds as both the insurers of last resort and as competitors to private sector insurers. Claims costs were reduced, insurance was more affordable for employers and insurance markets were stabilized.
This book examines these questions:
- Is there a plausible scenario in which many state workers’ compensation systems become seriously out of balance in 2030? And where the workers’ compensation reform process is unable to restore a reasonable balance?
- If so, what will be the likely causes of the imbalance? Why will the workers’ compensation reform process be unlikely to deliver effective solutions?
- What might replace state workers’ compensation systems?
When the balance in workers’ compensation systems is disturbed, the causes fall into either of two broad categories: developments outside of the workers’ compensation systems or developments within the systems. Internally generated imbalances typically involve the workers’ compensation statutes and regulations, as well as the incentives and behaviors of the system stakeholders and their agents and vendors. Externally generated imbalances result from forces like structural changes in the economy, societal norms and values, federal government actions separate from workers’ compensation or developments in the larger healthcare system.
Internally generated system imbalances are not unusual. In the past decade, several groups have raised concerns about the performance of state workers’ compensation systems. Some expressed concerns that too many state systems were not serving injured workers adequately. Other groups maintained that the systems were unnecessarily costly for employers and that alternatives may provide better benefits for workers at lower costs to employers.
In the wake of these critiques of state workers’ compensation systems, two groups convened “national conversations” among stakeholders from diverse perspectives. These conversations discussed the strengths and limitations in current state systems (IAIABC, n.d.; 2016 Workers’ Compensation Summit, 2016). Examples of the issues they suggested that should be addressed include:
- Reducing the complexity of workers’ compensation systems (both groups)
- Increasing the consistency/uniformity of state programs to reduce expenses (IAIABC)
- Emphasizing a focus on worker outcomes—e.g., return to work and medical recovery (both groups)
- Reducing the reliance on adversarial processes (both groups)
- Ensuring adequate (equitable) benefits (both groups)
These are examples of issues that are typically resolved by incremental changes to the features of existing systems—as has been done in the past. Hence the historic change process has opportunities to address these concerns and improve system balance where needed.
See also: The State of Workers’ Compensation
The developments discussed in this book are different from these. They originate outside of the workers’ compensation systems. Because of this, they are much less amenable to solutions developed by the workers’ compensation reform process.
Scenario for the 2030s
Workers’ compensation costs triple since 2016, with no real change in benefits to injured workers. Both employers and worker advocates agree that the systems are seriously out of balance. Despite multiple attempts at workers’ compensation legislative and regulatory reforms, too many larger workers’ compensation systems remain badly out of balance.
What are the drivers of this scenario?
- Baby Boomers exit the workforce at an accelerating pace, creating historic labor shortages. During labor shortages, employers lower hiring standards. Labor turnover also increases. The shortages extend to healthcare providers, delaying care for injured workers. Claim frequency increases, and disability lengthens.
- Restrictive immigration policies and practices worsen the labor shortages, magnifying the effects of the shortages on workers’ compensation systems. Automation mitigates the labor shortages but not nearly by what one might expect from reading the headlines about automation “destroying” large numbers of jobs.
- Accelerating growth of high deductibles in nonoccupational health insurance policies leads more insured workers to shift soft tissue injury cases to the free care alternative—workers’ compensation.
- As Congress and the administration repeal and weaken key elements of the Affordable Care Act (ACA), more workers lose their health insurance— particularly those covered by Medicaid and nongroup policies. These workers will look for ways to continue coverage for many conditions. For soft tissue conditions, the free care alternative offered by workers’ compensation will be attractive. As the number of uninsured climbs, the number of cases shifted to workers’ compensation will increase.
- Fee-for-service contracts are being replaced by payment models where provider organizations assume financial risk if costs exceed targets. These contracts cover most of the care paid by commercial insurers, Medicare and Medicaid. Workers’ compensation remains fee-for-service. Providers increasingly shift soft tissue injury cases to workers’ compensation to earn the fee-for-service payments, while not counting the costs of care for these cases against the performance contracts with the other payers. Workers’ compensation claims increase.
- Congress addresses the solvency crisis in the Social Security Disability Insurance (SSDI) program by abolishing reverse offsets. Moreover, new SSDI set-asides, akin to the Medicare set-asides, are mandated for workers’ compensation indemnity benefits. Workers’ compensation costs increase, as do the expenses involved in resolving claims.
Together, these developments raise workers’ compensation costs significantly—plausibly triple the level of 2016. Both claim frequency and cost per claim see large increases. The large increase in claim frequency is surprising because it is a stark contrast to the falling claim rates that we have come to expect over the previous several decades.
Workers’ compensation systems are seriously out of balance—costs to employers triple but benefits to injured workers have no real increase. In the past, the reform process would have moved the systems back toward balance. Yet this does not occur. Because the large cost increases arise from causes outside of the workers’ compensation systems, the typical workers’ compensation reform process has limited success in restoring balance in the systems.
Other developments outside of workers’ compensation systems also converge to create historic urgency (1) for both historic tax increases and spending cuts in virtually all government programs and (2) to improve the competitiveness of American businesses. This urgency pervades most public policy and strategic business decisions—including the search for solutions to what becomes known as the Workers’ Compensation Problem.
These external developments include:
Widespread Fiscal Distress at All Levels of Government and Millennial Voters Come of Age Politically
- We begin the repayment of the massive governmental debt and unfunded liabilities accumulated under the Baby Boom generation. This severely limits governments’ ability to maintain many current programs. Privatization and consolidation of government services increase.
- Because of the inherited public debt, millennials face the prospect of taxes doubling and historic cuts in government programs. Millennial elected officials and voters abandon many of the government budgeting norms and processes that had been used to kick the hard decisions down the road (from Boomers to millennials). Rather, they begin to make hard decisions on government spending to mitigate the impending tax increases. Given the debt that they inherited, millennials are unwilling to incur unnecessary public debt or additional unfunded liabilities that would burden future generations.
Globalization Pressures Intensify
U.S. employers face intensifying globalization pressures, driven by broadening diffusion of telecommunications technologies, especially in a handful of under- the-radar African and Asian economies that account for half of the world’s population growth. As competitors arise in emerging economies, U.S. firms are required to more often choose between aggressively reducing production costs of U.S.-made goods and services, moving production to lower-cost nations and losing business to foreign competitors.
See also: How Should Workers’ Compensation Evolve?
Sclerotic Legislative and Regulatory Processes
The processes for improving public programs, including workers’ compensation, become increasingly sclerotic. Pragmatic problem-solving and compromise- based solutions become the exception, rather than the rule, in both legislative and executive branches at the federal and state levels. Too often, pragmatic problem-solving is replaced by all-or-nothing processes driven by ideology, camouflaged self-interest, electoral tactics and fake “facts.” This makes it more difficult to move the now out-of-balance workers’ compensation system toward a better balance.