Recently, in one of his Risk & Insurance columns, our friend and colleague, Peter Rousmaniere, wrote a piece examining workers' compensation costs and benefits among the various states. There are a few organizations that do this annually. In my opinion, the most scholarly work is done by The National Academy of Social Insurance. However, the Academy, created in 1997 after the Social Security Administration stopped producing annual comprehensive national data and estimates on workers' compensation benefits and costs, doesn't really rank states in terms of either costs or benefits; it just lays out a mountain of interesting data .
The most incisive ranking of state benefits and costs is done by three organizations: the Oregon Department of Business & Consumer Services, the actuarial consulting firm, Actuarial & Technical Solutions (ATS) and the National Foundation for Unemployment Compensation and Workers' Compensation (UWC) headquartered in Washington, DC, which has, since 1984 published annual, and class specific, comparative state data. (We've blogged reports from these organizations whenever they've been published. Go here and here.
Rousmaniere used reports from Oregon and ATS to construct a sort of consensus ranking of the 50 states. In his ranking, Massachusetts emerged with the lowest costs and the highest benefits. How can that be? It sounds paradoxical. To answer the question, I thought it might be useful to peel the Massachusetts onion a bit, because Massachusetts is the Insider's home state, and we at Lynch Ryan played an active role in the turnaround.
Why does Massachusetts have low costs?
Throughout the mid-1990s, Massachusetts had some of the highest costs in the nation - annually about $2 billion in premium, compared to $878 million today.
Reform happened in 1992 (after a failure of reform in 1986). Here are some important reform initiatives:
• Indemnity wage replacement was lowered from 66 2/3% of an injured worker's average weekly wage to 60%. This provides incentive for injured workers to stay out of work no longer than is medically necessary. (A case can certainly be made that this somewhat gratuitous cut in benefits is unfair to injured workers.)
• The state introduced the lowest medical fee schedule in the nation (there is no pharmaceutical fee schedule).
Currently, the fee schedule for physicians is about 100% of Medicare rates, but that just became effective in April, 2009. Prior to that, the rate was about 95% of the Medicare rates of 2004. Hospital rates are even lower. The result is that the medical portion of loss costs in Massachusetts now hovers around 40%, significantly lower than the rest of the nation.
However, physician specialists no longer accept fee schedule rates (as my colleague and fellow blogger, Jon Coppelman, puts it, "Any hand surgeon that accepts the fee schedule of $725 will be doing hand surgery in the back seat of a Buick.") So, insurers must now negotiate fees with specialists (or with the consulting negotiators representing them - I'm not making this up!). The back and forth negotiating can delay care, frustrate employers and anger injured workers. Over time, we believe that the medical share of loss costs will rise in Massachusetts. It is interesting to note that, despite the low fee schedule, injured workers report satisfaction with their medical treatment.
• In the early 1990s, premium in the Assigned Risk Pool, the Residual Market, was $1.2 billion; today, it's $117 million, or 11.7% of the entire insured market. A number of initiatives contributed to this decline. Lynch Ryan offered a program recommendation that became one of the most influential: the QLMP, or the Massachusetts Qualified Loss Management Program (We might have designed the program, but we sure didn't pick the name!)
This program allowed employers in the state's Assigned Risk Pool to receive intense and in-depth training and education in managing their workers' compensation and injured employees from consulting firms that "qualified" to provide it. Firms became "qualified" by having their entire Massachusetts book of business analyzed by the Massachusetts Workers' Compensation Rating & Inspection Bureau. The Bureau designed a special one-year experience modification for each consulting firm's total book of business, comparing the Mod in the year prior to the consulting firm working with a client to the Mod in the year following the work. Consulting firms were then awarded a credit, graduated from zero to fifteen percent, depending on the decline in the Mod of their books of business in the year following the work. This credit was passed on to any company in the Pool that hired the consultant, and the consultant's fee would come out of the passed-on credit. This program gave Pool employers a way out, and was later replicated in Missouri and West Virginia.
We think it an elegant program, because each consulting firm had to re-qualify every year. Under Paul Meagher's steady leadership, The Rating Bureau has done an excellent job managing this program, which continues to this day.
• The state lowered attorney fees: a prudent and necessary move to reduce frictional costs (but the howls of protest still echo in the legislative chambers). They also hired and trained more judges, making the entire system more efficient.
Why does Massachusetts have high benefits?
Central to the reform effort was pegging the maximum temporary total disability (TTD) benefit to the average industrial weekly wage in the state. The maximum benefit is currently $1,094 per week. However, only if an injured worker's pre-injury weekly wage is $1,823 or more will he or she receive this generous maximum. Thus, while indemnity only covers 60 percent of the average weekly wage, the maximum of $1,094 is substantially higher than what is available in most states.
There were many other reforms, but, to my mind, these have been the most influential. After twenty years, it is clear that the Massachusetts workers comp reforms were well crafted. The legislators, regulators, insurance executives, union representatives and employers who spent long days and nights dissecting the workers' compensation crises of the early 1990s built a system that has stood the test of time. As I tell clients, "There may be reasons for not doing business in Massachusetts, but workers' compensation isn't one of them."