A century of workers’ comp: What’s next?

We knew the state’s workers’ compensation program was overdue for an overhaul. Or at least a tuneup. That’s why we assigned Erik Smith to write about the the century-old program for our June issue, due on newsstands later this month. Given that the issue has divided the state Legislature to the point that it may have to convene a second special session, we thought it prudent to provide an advance look at Smith’s story, so we’re running it below in its entirety.

A Century of Workers Comp

As Washingtons state-run insurance system turns 100, it faces tough new challenges.

BY ERIK SMITH

Dallas Baker, a Seattle firefighter, was rushing to the front of a burning Lake City home six years ago with a bundle of hose on his shoulder when his feet slipped on the grass and his legs went out from under him. He picked himself up and assumed he was fine. But as he was chopping holes in the roof to put out spot fires in the attic, his knee suddenly stiffened, and he found he couldnt move.

Health insurance paid for Bakers surgery, but it was Washingtons workers comp system that paid 80 percent of his wages during the six weeks it took him to recuperate.

Thats why workers comp is there, says Baker. Sometimes theres smoke to the floor, its pitch black, you cant see anything, and youre tripping over hose lines and furniture. Its not if youre going to get injured, its when. Baker, who is the benefits officer for Firefighters Local 27, cant understand why anyone would want to change the system.

But business advocates in Olympia say costs are out of control. Washington now has the second-highest level of benefits in the nation, according to the National Academy of Social Insurance.

Gov. Chris Gregoire and a coalition of Republicans and Democrats have been pushing a plan to drastically cut the systems costs. It would allow the state Department of Labor and Industries (L&I) to offer lump-sum settlements to injured workers in place of pensions. L&I, which manages the program, says thousands of pensioners would rush to settle, and $1.2 billion in long-term liabilities would be eliminated in the first two years alone. And the change might go a long way toward correcting what many, including the governor, call an unsustainable situation in which 8 percent of claims generate 85 percent of costs.

But labor unions are dead set against the measure. Its the latest chapter in a debate that has raged in the Legislature for years. Whats new is that some of labors alliesincluding Governor Gregoirewarn that failure to reform the system could lead to more radical measures to abolish the program altogether in favor of private insurance.

Rising Premiums for Rising Costs

The program faces many problems. For a start, State Auditor Brian Sonntag says the accident fund has been insolvent for a year and the medical-aid fund is headed the same way. The program pushed through rate hikes of 7.6 percent last year and 12 percent the year before, at a time when business could least afford them, resulting in an explosion of business complaints. But even with those rate increases, skyrocketing costs continued to eat into reserves. The system now spends $1.79 for every dollar it takes in. With $11 billion in reserves, the system isnt going broke anytime soon, but those reserves shrank by $360 million last year alone.

Its easy to blame short-term issues like the recession and losses from a decline in the value of the programs reserves invested in the stock market. But the long-term trend is troubling. The average claim for time lost as a result of injuries is now 286 days. Thats more than double the national average, and about 25 percent higher than in Washington just 10 years ago. And an injured worker who files a claim is twice as likely to be awarded a pensiona monthly sum given to workers for lost earning poweras he or she was 10 years ago.

A Kinder, Gentler Insurance Company

In 1911, when Washington was among the first half dozen states to launch a workers comp program, the idea was to have a no-fault plan that eliminated the workers right to sue an employer for injuries, but required employers to pay premiums into a reserve that would be used to compensate workers for any legitimate claims. Today, under an arrangement unique to Washington state, workers also pay about 30 percent of the cost.

The original idea was to provide certain, prompt, and reasonable monetary compensation, according to the commission that wrote the law, with a minimum of economic waste. The idea was to keep out lawyers and insurance companies that would each try to get their own cut.

Over the years, the program became increasingly burdened by new demands and more generous benefits. Not only have the costs of medical services swelled, but new types of injuries and occupational diseases have been added to the list of ailments covered. Periodic reform efforts managed to stave off calls to allow private competition with the state system; the most recent won the state a 1992 Innovation in American Government award from Harvard Universitys Kennedy School of Government. But todays problems may be harder to overcome, critics say, because labor has come to view the program more as a social-service safety net than an insurance system.

Although the states largest companies are allowed to self-insure, Washington is one of only four states that dont allow private insurance companies into the market. That gives the state program 2.3 million captive customers, servicing 163,000 employers. With no bottom line to protect, critics say there is little incentive for the program to keep costs down. They maintain the state does a poor job of prosecuting workers who file fraudulent claims, or reining in the systems fast-rising medical costs. And while the private insurers are kept out, lawyers arent: Workers comp claims have become a specialty area of the law, and lawyers take a big cut of the state payouts with their contingency fees.

Why Number Two is Awful

State officials argue that the burden on business is not bad compared to other states. A widely cited annual report from Oregon, for instance, shows this state is smack-dab in the middle in terms of the burden on business while high in terms of benefits. The state is able to offer high benefits at low premiums, they contend, by cutting out private insurance companies.

But the same report previously put Washington at the bottom in terms of costs, so the report supports businesss contention that costs are rising. And businesses say the state is actually far worse off than the report suggests. Companies with employees in both Washington and Oregon, for example, often find their expenses are about 40 percent higher here than in Oregon, according to the Washington Roundtable, an association of the states largest businesses.

The perception that Washingtons workers comp costs are high could have an impact on the states ability to keep and attract businesses. Were being judged every day, says the Roundtables James Warjone, chairman of the Port Blakely Companies. The Roundtable says Washingtons No. 2 ranking in terms of the quality of benefits is a warning sign for business, and argues the state should at least get out of the top 10.

Although its unclear how much Washingtons high workers comp benefits had to do with Boeings decision to put its new 787 assembly plant in South Carolina, many worry it could figure into the companys upcoming decision about where to build the successor plane to the 737. Boeing is self-insured, meaning it doesnt pay workers comp premiums, but its costs are driven up by the requirement that it provide the same level of benefits as the state system offers. Boeing is also concerned by the effect of high premiums on the costs of its suppliers.

When Politicians Run an Insurance Company

In the Legislature this spring, business lined up a coalition of Republicans and Democrats to demand substantial reform. At press time it was unclear if the proposal to offer voluntary lump-sum settlements would pass the Legislature. Critics say the measure would make the program more viable for now, but future reforms might still be required.

Jeff Johnson, president of the Washington State Labor Council, who was working hard to make sure the measure didnt pass, is convinced the crisis will blow over in any case. The system is fundamentally strong, fundamentally solid, and, you know, once the economy comes back, hours come back, premiums come back, this is going to be a forgotten chapter, he says.

Its a bit of a gamble. The governors office and L&I warn labor that if fundamental reforms arent put in place, the entire system could blow apart. Although a somewhat more modest voter initiative from the Building Industry Association of Washington to allow private insurance companies to offer plans in the state failed to pass last year, a better-written measure in the future could win public support.

Its the kind of situation you might expect when an insurance company is ruled by politics, says Kris Tefft, lobbyist for the Association of Washington Business. If it bends too far in one direction, it undermines the other. Whatever lawmakers do in 2011, this is one fire that wont be put out anytime soon.