January 25, 2007

Comp in New York: Death Spiral Finally at an End?

Workers comp seems to embody the worst of all possible worlds in New York state: the benefits are way too low; the premiums are way too high. The system is full of friction, with virtually every claim decision requiring the involvement of a judge. The system, forged in the cauldron of early 20th century labor-management conflicts, is in deep trouble.

New York has always been a high cost state. With California and Texas cutting costs through dramatic reforms, New York might be duking it out with Florida for the dubious title of Number One: highest comp costs in a major industrial state. The cost of comp has become a political issue, with newly elected Governor Elliot Spitzer weighing in. Spitzer concedes that the system fails everyone: "the employers who pay some of the highest premiums in the country...and the workers who receive some of the lowest benefits."

The Payroll House of Cards
There is one aspect of the problem that fits readily into Spitzer's comfort zone: rampant fraud. We read in the New York Times that premium fraud has reached an unprecedented magnitude in the Empire State. The Fiscal Policy Institute estimates that employers are avoiding payment of somewhere between $500 million and $1 billion in premiums - 15 percent to 20 percent of all premium in the state. (The premium avoided exceeds the premium paid in most states!)

The institute compared total employee payroll reported to the Labor and Tax departments - $389 billon - to the payrolls reported for workers comp. The comp payroll came in around $311 billion. That means that New York either has the largest concentration of independent contractors on the planet - or employers are under-reporting payroll to their comp carriers.

Interesting to note, we recently blogged the fraud charges against Cover-All, a huge contractor in California. Their scam was uncovered with the same simple methodology used in New York: payroll tax records compared to payrolls reported for comp. You would think in this age of the computer that such comparisons would become the norm.

As is usually the case in rampant fraud, it is the legitimate, law abiding companies in New York who are paying the price - in the form of very high costs (and mediocre benefits) for their mandated coverage. Injured workers are going to receive benefits, regardless of whether their employers paid all, part or none of the comp premiums. As the costs associated with premium avoidance are shifted to the fully insured employers, their cost of doing business keeps going up. That, in effect, is the comp death spiral.

In some respects, the solution to New York's comp problem is simple : First, update the state's comp law, procedures and benefits to bring them in line with the twenty first century. And second, establish a credible enforcement effort to crack down on wide-spread abuse. It won't be easy, but as California and Texas have shown, it can be done in a relatively short time. All that is needed is a sense urgency - a sense that the current mess must not be allowed to continue. Given that the system is so unfair, inefficient and wasteful, reasonable people should be able to achieve the necessary reforms in the proverbial New York Minute.

| 5 Comments

5 Comments

Thank you for your recognition of the significant employer fraud that exists in New York State. Certainly, correcting this problem must be a priority before anyone contemplates cutting benefits to injured New Yorkers - which is exactly what capping permanent partial disability benefits does. However, your argument that New York should jump on the reform band wagon of states like Texas and California is unconvincing. What is your argument for capping permanent partial disabilities on the merits? What happens to the working poor whose benefits have run out yet are still unable to earn their pre-injury wage? Do they go on welfare with the taxpayers footing the bill rather than the employer? According to your theory, the "comp death spiral" applies only to the competing interests of honest vs. dishonest employers. The "real death spiral" is when policy makers forget that workers gave up their right to sue employers in return for adequate compensation, and the working poor are left to eat the crumbs off the employer's country club lounge floor.

Troy: Thanks for your comment. I am not suggesting that New York use the CA and TX reforms as a template. New York will have to fashion a solution that grows out of its own history. The solution has to confront the overwhelming friction that has permeated the system from the very beginning. The state needs to focus on improved and expanded managed care, coupled with reasonable rate setting; more flexibility for carriers in performing their roles; and a significant increase in benefits, coupled with return-to-work incentives. The death spiral, as I understand it, involves ever-increasing costs to employers, combined with ineffective benefits for injured workers - a no-win situation that is pretty much the current state of affairs in New York.

I know workers comp is handled state by state, but are there any studies that take a national look at fraud and compare levels of fraud between states?

If New York follows Calfornia's example, it will have shockingly lower benefits than the ones that are thought to be too low now; it will have somewhat reduced premiums; and it will have years of expensive litigation and chaos.

It is easy to admire a system from afar, believing hype that it is "reformed." I suggest observing close hand what is really going on.

Marjory Harris
Certified Specialist in Workers' Compensation Law, State Bar of California

Editor, getMedLegal.com

On the issue of payroll, you overlooked a rather cogent rebuttal by the NY Rating Bureau at http://www.nycirb.org/rb_docs/Report%20Rebuttal%20013007.pdf

In response to the commenter who asked about the comparison of fraud by state, the short answer is no. There will probably never be a very valid comparison of fraud by state. Fraud comes in many forms and differs from state to state, depending on the rules, penalties, and resources to find and prosecute. And of course, the practitioners of fraud invariably try to conceal their actions, so it's not something you could just mail out surveys on and expect candid answers.
The upshot of this is that without the ability to compare, it's impossible to fully refute charges that fraud is getting worse, or is more prevalent in one state than another. We can agree that fraud should be minimized, but there is some point of diminishing returns on efforts to find and prosecute it.

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This page contains a single entry by Jon Coppelman published on January 25, 2007 4:30 PM.

State Farm is (finally) There was the previous entry in this blog.

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