For sweetest things turn sourest by their deeds;
Lilies that fester smell far worse than weeds.
~ William Shakespeare ~ Sonnet 94
Here at Workers Comp Insider and Lynch Ryan one of the things we find most interesting is the way in which different states approach our bread and butter issue. Counting the District of Columbia, there are 51 US jurisdictions involved in workers’ compensation, each with a different law. That’s 51 opportunities to get it right, or 51 opportunities to get it wrong.
Beginning in Wisconsin in 1911, with other states following thereafter, every jurisdiction started with the right thought, a basic and simple no-fault concept: employers agreed to provide medical care and wage replacement for injured workers; injured workers agreed not to sue their employers in return for the medical care and wage replacement.
Along the way from then to now every jurisdiction has run into problems at one time or another. We won’t go into the many bumps in the legislative road. Let’s just say that when things got bad enough most states took on the job of repairing or rebuilding their systems as best they could. According to my actuary friend, Don Bashline, it was Herb Stein, Richard Nixon’s Chairman of the Council of Economic Advisors (and father of the currently famous Ben Stein), who said, “In economics, when things get bad enough they will change.” Well, when things get bad enough a state will prune its workers’ compensation tree. What’s going on in California right now proves the point.
New York is another case altogether. New York is a state that has managed to get it very wrong, and, like Shakespeare’s lilies in Sonnet 94, its workers’ compensation system is festering. But the state now has an opportunity to take decisive legislative action to get it right – in a hurry. The election of Eliot Spitzer provides the opportunity.
Just how has New York got it wrong? There are four basic problems, each with many contributing factors: The four problems:
- Depending on whom you believe, New York’s workers’ compensation costs to employers are somewhere between the sixth and tenth most expensive in the nation, and, because of some Byzantine ratemaking idiosyncrasies, this may understate the true ranking.
- Despite, or maybe because of, the relatively high employer costs, audit studies are now showing that anywhere from 20% to 30% of the state’s employers seriously underpay their workers’ compensation premiums. The studies estimate that this costs the system anywhere from $500 million to $1 billion annually.
- Employee benefits are screwy. For example, the maximum weekly benefit for temporary total as well as permanent partial disability is a paltry $400 (it hasn’t changed for 15 years). But here’s the screwy part – the benefits can go on forever. There is no cap, no cut-off point. This is a huge issue, very contentious. Any move to cap permanent partial awards in New York is going to have to be part of a much larger compromise reform package that provides decent benefits for injured workers. Although permanent partial claims make up less than 12% of all claims, they account for more than 73% of all payments. This makes New York’s employee benefit ranking appear to be somewhere in the middle of the pack, which is very misleading. Spousal weekly death benefits also max out at $400. By comparison, in my home state of Massachusetts, where employer costs are among the lowest in the nation and employee benefits among the highest, the maximum weekly indemnity benefit is more than $1,000 (although wage replacement is pegged at 60% of the injured worker’s average weekly wage, as opposed to 66 2/3%, up to that $400 maximum, in New York.)
- No claimant sails smoothly through the New York system, because New York has more frictional frustration and cost than any other state in America. There is no pay without prejudice period, so roughly half of all claims are initially denied by adjusters, even though the ultimate percentage of non-compensable claims is around 5% (How would you like to be a well-intentioned employee who suffers a legitimate work-related injury only to have your claim denied simply because that’s what’s best for the system?). Nearly every action by either employee claimant or insurer must go before a judge for a hearing. That’s more than a mind-boggling 500,000 hearings a year. So, there is an unavoidably disproportionate level of attorney involvement, and claims can drag on for months and years. Naturally, this makes the costs of running the system extraordinarily high compared to most other jurisdictions.
There are many other challenges to New York’s workers’ compensation system, too numerous to mention in this blog post, but they all emanate from the four basic problems cited above.
The politics of bringing New York’s system into the 21st century will not be easy, but I know of no involved party, be it labor, business or even the legislature, that is happy with the current horrendoma. On the business side, both the PIANY (Professional Insurance Agents of New York) and the NFIB (National Federation of Independent Businesses) have been forthright in their constructive critique of the system. Labor has spoken out many times about the benefit inequities. Surely, in desperate times these groups, and others, can work together toward a common goal? Other states confronted with similarly difficult challenges to their worker’s compensation systems have paved the path, notably, Massachusetts, Pennsylvania, Indiana, Texas, Florida and California (although, in our opinion, the last two still need more work). What’s needed in New York is what was needed in those other states: political willpower, the commitment to do what’s right for all parties and a healthy dose of mutual respect and common sense. Oh, and somebody sitting at the head of the table making sure that everyone stays focused.
Which brings us back to Governor Spitzer. Newly elected, he has political capital, a mandate for change and a reputation as someone who can get things done (any fellow who can stare down former AIG CEO Hank Greenberg has got to have a lot going for him). He’s already said that workers’ compensation will be a priority. How does he make good on that promise? We suggest that he needs to assemble a group of committed insiders and experienced outsider professionals who understand what has worked in other jurisdictions, charge them to come up with a plan to rebuild the system from the bottom up, give them the resources to do it and then hold them accountable to getting the job done within a year. It’s that important.
It would certainly be interesting to be part of that project. In any event, we will continue to track New York’s progress, or lack of it, with considerable interest.