Tuesday, April 10, 2012

Reform Must Include Incoming and Outgoing Costs

Spring is in the air and Spring means new life and change.

Starting today the California Department of Industrial Relations (DIR) will take in comments from industry vendors about what to do with the state's workers' compensation system, in a series of public forums where speakers are limited to two minutes each.

The forums have proved popular to the industry with over 1,500 people across the state signed up to attend causing DIR to add several more dates and venues to the schedule, for a total of nine public forums during the month of April.

The administration of Governor Jerry Brown has indicated that either this year or next there will be changes coming to the big workers' compensation system of California. The administration is seeking to increase permanent disability indemnity benefits but has to find savings in the system to offset the increase in costs as a result.

While it is anyone's guess at this time where those savings will come from, there are not too many choices, and the easiest target is from medical vendors since the medical component is the single biggest cost item in a workers' compensation claim, has the greatest growth ratio of any item by a significant margin, and is the most complex with billing codes, reimbursement schedules, reporting requirements, utilization review and various other complexities adding to frictional costs.

By all accounts thus far, the focus of the Brown Administration is on the benefit delivery system, and certainly there are benefit delivery costs that can be challenged.

But the costs of benefit delivery impact very few employers in the state from a direct perspective. And disputed claims likewise comprise a very small percent of all claims made.

There is very little discussion I see about the underwriting market process.

Employers, large and small, see the bottom line quite clearly: it's the premium quote that requires payment annually. Ask most any business owner in California whether they care about permanent disability indemnity or medical provider networks, and unless they are actually involved in the workers' compensation industry they will tell you they don't know, don't care, and assume that the system will work as intended because that is what they are paying for.

While benefit delivery costs can be an important part of the ultimate cost to the employer, as I said, the employer for the most part doesn't know about and doesn't care about benefit delivery costs. It's the cost of producing the piece of paper that guarantees coverage that employers see at the end of the day as most important. And this is where disturbing trends appear.

A friend of mine, New Jersey lawyer (and photographer) Jon Gelman, recently opined that the most quiet trend in the United States concerning workers' compensation is the "de-facto opt-out process".

Gelman argues that there are legitimate and illegitimate schemes to opt out across the states. In Michigan, for instance where unemployment was near 14% at its peak, there is a bill pending that would exempt religious organizations from having to obtain workers' compensation insurance.

Of course, we have the Texas system where workers' compensation is completely voluntary, though one runs the risk of civil disaster without some insurance protection - but for large employers, such as Wal-Mart, "going bare" is a viable option because a company that big has the resources to mitigate the risk.

In Oklahoma there is a very good chance that employers will be able to elect out of workers' compensation to provide similar benefits to their employees while retaining the protection of an exclusive remedy. I see this as a growing trend that will put this 100 year old industry on its ear.

Illegitimate schemes in the "de-facto opt-out process" involve those employers that decide that the benefit of either mis-classifying workers or just not purchasing coverage at all outweighs the risk of getting caught.

In California, DIR has done a great job under the new leadership of Christine Baker of coordinating state resources to mitigate the impact of illegitimate opt-outs. I think this will pay dividends down the road for ensuring an adequate capital base upon which to spread the workers' compensation risk.

But it all comes down to the premium at the end of the day which will motivate some employers to seek an alternative, whether it is to opt-out, move to Oklahoma or Texas or take some other action that is contrary to the public policy of ensuring that all workers in the state are protected against the medical consequences and financial ruin of a potential work injury.

The industry is full of statistics and evidence on the costs of benefit delivery. There is not so much study on the cost of the underwriting market process.

There can not be a true reform without analyzing both the incoming dollar and the outgoing dollar - they work together to generate the final number that concerns the employer.

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