Workers’ Compensation: Is the Present System Sustainable?
The future of the workers' compensation system in the United States is uncertain. On the one hand, there is concern that the low interest rate environment will continue and premium volume, based on payrolls, is unlikely to increase significantly. On the other hand, if the economy turns around, at some point interest rates are likely to increase. The positive aspect of rising interest rates for insurers' investments, however, may be offset by a significant increase in inflation that will escalate the severity of workers' compensation losses.
Another factor with longer-term implications for workers' compensation insurance is the aging of the U.S. workforce. According to the Bureau of Labor Statistics of the U.S. Department of Labor, the presence of workers 55 years of age and older in the workforce is increasing. Although frequency and indemnity severity are lower for older workers, medical severity in the claims of older workers is higher. Not only does the aging workforce have a potential impact on workers' compensation claim costs, it is also a potential factor in insurers' ability to manage claims. A large percentage of professionals in the insurance workforce are nearing retirement age. As these people retire, they will take a significant amount of knowledge and expertise with them. Workers' compensation is complex, and it will require extensive training to replace retiring insurance professionals.
The U.S. workers' compensation system is an amalgamation of benefits and regulations that differ widely from state to state. As in a patchwork quilt, there is a common theme—to provide benefits quickly to injured workers and, in return, to remove workplace injuries from the tort legal system. However, this system, in attempting to be a hybrid between employee benefits and tort recovery, may unravel. The system contains significant litigation. Unlike the tort system under which a case is typically resolved in its entirety at a trial if not settled beforehand, a workers' compensation case may be litigated for years over various types of benefits. Many states permit settlement; others do not.
The passage of the Patient Protection and Affordable Care Act in 2010 has led to discussion on workers' compensation blogs about the possibility of federal regulation of workers' compensation. Most European nations administer workers' compensation benefits through their national social security systems.
One future possibility that has not been widely discussed is to bifurcate medical and indemnity benefits in workers' compensation. Prior to the passage of federal healthcare reform legislation, this was not a realistic possibility because many injured employees either did not have health insurance or would lose it if they lost their jobs after becoming unable to work. Once health insurance becomes a requirement, employees could obtain medical treatment after a work-related injury as they would for any non-occupational injury or illness.
In this scenario, workers' compensation benefits could remain state-regulated and provided mainly by private insurers. Insurers could have the right to independent medical examinations as the Social Security Administration does in making determinations of eligibility for disability benefits. Because the increase in medical costs has driven most of the increase in workers' compensation claim severity, insurers are more likely to be able to manage indemnity costs.
Although workers' compensation medical costs have been increasing at a rate higher than the medical Consumer Price Index (CPI), these costs comprise only 2.4% of total expenditure on medical care in the United States. Administration of medical benefits related to occupational injuries through health insurance rather than through the current workers' compensation system would likely result in lower costs because of pharmacy and other discounts that are available to health insurers.
Other approaches would be to follow the European model of administering workers' compensation benefits through the Social Security system or to provide some level of federal benefits. There is speculation in various insurance publications that the legislation to provide benefits for 9/11 responders creates a precedent for future federal workers' comp benefits.
The National Council on Compensation Insurance designation of the workers' compensation insurance market as "precarious," along with similar statements from the heads of the largest U.S. comp insurers and their voluntary pull-back from writing this line of business, is a serious warning. This comes in the context not only of a severe economic recession but of years of escalating claim severity driven mainly by rising medical costs. The probability of the current system remaining sustainable over the next decade appears to be low. This may be the right time, following the recent passage of healthcare reform legislation, to consider a transformation of workers' compensation.
There are inherent concerns within the system that have been exacerbated in the current economic environment. It is these longer-term trends, such as medical inflation, that present the greatest risk to the foundations of the current framework. There are opportunities either to make changes within the present system or to begin discussion on ways to transform and modernize the system. If and when such changes occur will determine whether or not there is a crisis and will impact its severity and the future of workers' compensation.
Judith Vaughan, CPCU, AIC, is director of Content Development for The Institutes.