Friday, March 30, 2012

Lawyers Add Net Benefit to Work Comp Claims

Yesterday I talked about how the debate in California about reform needs to focus on providing stability and predictability to business, not about costs, and that the discussion needs to include the underwriting market in addition to the benefit delivery system.

Today we're going to look at the current scapegoat in the California benefit delivery system, the high rate of litigation and the role of attorneys in the system.

I've heard it time and time again the the problem with the California system is the attorneys: there's too many making a big deal out of a non-dispute increasing costs and delays for everyone and doing no one any favor.

Do I have the argument correct?

Let's assume for the sake of debate that the "attorney problem" is accurate and that the role of attorneys in the system is an excess frictional cost.

How much of a cost are they? There is data suggesting that the participation of attorneys increase the cost of a claim significantly, but I submit that while the influence of attorney activity may inflate the cost of A claim, that the participation of lawyers overall in the benefit delivery system provides value that is not accurately measured.

First, let's understand why an attorney gets involved in the first place.

Overwhelmingly, in both my personal experience (when I was a defense attorney I would always ask an injured worker in a deposition why they sought an attorney) and in conversation with an innumerable number of both claimants and attorneys (both applicant and defense), the single most common reason someone seeks an attorney is because the system is hugely complex and frightening.

One need only look at the stack of paperwork that is generated when a workers' compensation claim is initiated with official, scary looking forms and standardized communications advising of potential loss of rights and entitlements if one does not do this or that within specified time periods.

These forms and letters use big words, lots of acronyms, and are confusing to people that don't see them day in and day out. If they don't scare a claimant to an attorney at least the prudent claimant is going to seek advise to make sure that they aren't going to be giving up some fundamental right.

The second reason an injured worker sees a lawyer is because they are not sure whether their claim is being managed correctly. The system sets up an adversarial relationship almost from the start and our culture has imbibed distrust in the insurance industry, and increasingly, in the medical profession. People on the street do not trust an insurance company to do the right thing, in particular when it is someone's health on the line.

So, first and foremost, it is the PROCESS that drives people to lawyers.

Some claimants may go to lawyers before "knowing" they are injured, but I submit that is a very small population and that the vast majority of attorneys practicing "applicant" law reject claims of retaliation.

But once a claim ends up in a lawyer's hands it is going to be managed to extract maximum financial value out of the case - that is how a lawyer gets paid. So of course a litigated claim is going to cost more, in terms of hard dollars leaving the reserve bucket, than a non-litigated claim.

This fact drives an assumption that lawyers are an unnecessary burden on the system and that they create unwanted costs.

However, I submit that lawyers, at least in today's workers' compensation environment, for the most part provide value to the system in several ways.

At least one researcher has concluded that the process of closing a workers' compensation case by Compromise and Release (C&R) in fact returns injured workers to the productive work force providing an immediate and sustained increase in labor supply. For those of you not in California a C&R is a complete settlement of a claim with no "tail" left in either indemnity or medical benefits.

Henry Hyatt of the U.S. Census Bureau - Center for Economic Studies concluded in 2010 that rather than discouraging injured workers from returning to work or otherwise wasting away in non-productive leisurely pursuits, that the conclusion of cases by C&R result in a 5% increase in the quarterly labor force re-entry rate and an 8% decline in the quarterly labor force exit rate. (The Closure Effect: Evidence from Workers Compensation Litigation, Hyatt, 2010).

Hyatt theorizes that conclusion of a workers' compensation claim by C&R provides the invaluable psychological effect of "closure" thereby relieving the injured worker of the burden of a significant life-altering event and allowing that person to start moving on with life.

Hyatt admits that, "My greatest limitation was that I lacked a method of validating that it is closure, and not some unknown other factor, that induces claimants to resume work when they reach an irreversible settlement with their insurer."

There are roughly 100,000 new litigated claims filed with the Workers' Compensation Appeals Board (WCAB) annually and roughly 360,000 open adjudicated claims in the system at any one time.

Overwhelmingly, these cases are settled and very few actually end up in trial testimony. Most of these cases settle by C&R.

If we are to extrapolate Hyatt's findings to the participation of lawyers in the California system, then they are in fact increasing the labor force reentry rate, and decreasing the labor force exit rate in a disproportionately positive manner.

So while it is easy to scapegoat attorneys in the system, there is evidence that there is a value added component to attorney participation.

Perhaps the real issue is the length of time an attorney managed case remains in the system - that is an issue of PROCESS, not of attorney participation. If a C&R'd case is providing some net economic benefit to the state, then the faster a case reaches conclusion the sooner the net economic benefit is realized and the lower the overall costs are.

Bottom line - California reform on the benefit delivery side needs to take a very close look at smoothing and simplifying the process.


  1. I'm very much in agreement with your bottom line. I'm not so sure about attorney value to the system. You documented previously the cost to the system of represented cases versus non-represented. It's considerable. And I wonder, did the Henry Hyatt study factor in the common applicant attorney counsel to clients not to return to work prior to settlement lest they lower the value of the potential C&R?

  2. Thanks Larry.

    Bill Cobb in a LinkedIn group did a very good review of this study:

    There may not be a $$ value that would be traditionally associated with attorney involvement because invariably once the lawyers get involved costs accelerate exponentially, but in terms of getting "closure" - I think this is a very real value.

    Of course there are those cases where closure just seems impossible!