Workers' Compensation: Rx for Policy Reform
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Workers' compensation is the oldest government-mandated employee benefit program in the United States. Each state has its own system. State systems vary, but when a worker is injured on the job or has a work-related illness they all provide coverage of medical costs, replacement of lost wages and payment for death or dismemberment.
Though workplaces became much safer in the 20th century, and job-related injuries declined, the soaring claim costs of state-mandated workers' compensation insurance has offset the decline in injuries. As a result, employers face increasingly higher insurance premiums and self-insurance costs, which reached nearly $60 billion in 2000. Although the average cost of workers' compensation premiums nationwide is less than 3 percent of payroll, premiums vary widely by industry. In high-risk industries, workers' compensation costs are often greater than health insurance premiums or Social Security payroll taxes. Workers implicitly pay part of these costs through reduced wages.
Costs are increasing because state systems provide incentives for employers, employees and others to behave in ways that cause costs to be higher and workplaces to be less safe than they otherwise could be. Specifically:
- Insurance premiums, especially for small employers, are not fully experienced-rated; as a result, firms that improve workplace safety cannot reap the full rewards and others are not penalized for poor safety practices.
- Employers are not allowed to use their regular group health plan to cover workers' compensation injuries; as a result, employers and employees do not benefit from cost control mechanisms common under normal health insurance, and employees have no incentive to economize on their use of health care. (For example, on the average, it costs twice as much to treat the same injuries or conditions under workers' compensation as under group health plans.)
- Employers are also prevented from using ordinary disability insurance for workers' compensation; as a result, workers report injuries that may not be work-related, stay away from work when it is not medically necessary, and engage attorneys to pursue questionable claims. (Whereas disability insurance typically requires a worker to be unable to work for 30 to 90 days, workers' compensation benefits begin after a wait of as little as three days.)
- Workers' compensation premium rates are highly regulated in some states, and insurance markets are not as competitive as they could be; as a result, many small firms pay more than necessary for coverage. (For example, average premiums as a percentage of payroll are 50 percent higher for firms of less than 500 employees than for larger firms.)
- In general, individual employees do not reap the rewards or bear the full financial costs of their individual behavior; thus they have weakened incentives to prevent workplace injuries or to economize on the use of benefits if injured.
- Employees are typically overinsured for workplace injuries; they cannot trade less complete coverage for higher wages or other benefits.
Addressing these problems would increase the efficiency of the system by controlling costs and giving workers a greater choice of benefits. If state systems were properly reformed:
- Employers could lower their premiums by improving safety and reducing claims costs if premiums were fully adjusted for the firm's experience, rather than based upon occupational or industry risk ratings.
- Employers could integrate employee health plans and workers' compensation medical coverage so that employees could use the same provider networks and employers could pay the same negotiated fees - thus reducing costs and improving care.
- Employers could provide wage replacement benefits under an integrated disability plan - thus reducing perverse incentives to make false claims or to claim a disability as work-related when it is not.
- Deregulating insurance rate-setting and allowing alternative insurance arrangements would give firms more options to reduce their costs, especially if small firms were allowed to self insure or at least purchase high-deductible policies.
- Employers could establish Workers' Compensation Accounts (WCAs) for employees, funded by savings on premiums from selecting more limited conventional coverage; individually-owned WCAs would be a form of self-insurance that would give workers an alternative to third-party workers' compensation benefits.
- Employees could voluntarily agree to selectively relax the employer's strict liability (establishing liability by contract) in return for higher wages or other benefits.
These measures would lower employers' insurance costs and allow employees to make tradeoffs between overly-generous workers' compensation coverage and higher wages and other benefits they value more.