Should workers’ comp be eliminated for 90% of workers and employers?

In the current issue of IAIABC’s Perspectives magazine, Berkeley researcher Frank Neuhauser proposes the elimination of workers’ compensation for 90% of workers and employers.  [The full edition of the magazine including Frank’s article are available to registered IAIABC members  and non-members who take advantage of the free registration available at http://www.iaiabc.org/iaiabc/Perspectives.asp ]. Frank bases his argument on the following facts, all of which he supports with convincing data:

1.   working actually reduces the overall number of injuries
2.    work reduces the overall costs of health care
3.       occupational injury risk has dramatically declined
4.     the forty percent of occupations with the greatest risk represent only 10% of employment

The statements are simple matters of fact and the presented data reinforce his main points.  Work is good for you and often has a protective effect; occupational injury rates have fallen; and certain occupations have higher injury frequency rates than others.  He argues,

“If one accepts the premise, as I believe I have demonstrated, that work reduces the overall risk of injury and one assumes this can be extended to illness, as I believe it can, then one should consider what this means for the continued maintenance of the workers’ compensation system.”

His paper proposes states regulate work-related injury coverage for the 90% of workers in ways other than workers’ compensation.  He suggests healthcare costs associated with work injuries be paid for through existing health benefit plans the worker may have and that one of three mandated alternatives provide income protection:

a.       Requiring employers to offer short-term disability insurance,

b.      Adopting a universal, state disability insurance program, like California,

c.       Allowing workers to buy disability insurance with the higher wages that would develop over time.

Note that Frank does not propose or support straight “opt-out” provisions.  Rather, he seeks alternatives that will make workers and employers potentially better off  (or at least not worse off) than under the workers’ compensation regime.  He concludes that workers’ compensation is a “relic of the early industrial age and does not fit the vast majority of the 21st century workplace”.

It is hard to argue with the data presented.  Frank’s four basic premises (1-4) are factual. His argument is focused on efficiency.  He believes mechanisms other than current workers’ compensation provisions would provide more efficient means of payment of the healthcare expenses and wage-replacement costs associated with workplace injury.   His alternatives (a-c), however, gloss over some very important points. 

Containment and attribution of costs

One key aspect of workers’ compensation in Canada, the US, Germany,  and Australia (and many other countries with similar systems) is the containment and attribution of the costs of work-related injury to the industries that give rise to them rather than externalization to others including taxpayers.   Ensuring the cost of work-related injuries, illnesses and deaths charged to the employers or industries that gives rise to them is a powerful incentive toward prevention,  and investment in occupational health and safety.   The alternatives proposed remove this powerful link.  If not workers’ compensation, then who should pay and what are the consequences of any alternative?

Let’s look first at who pays medical and other healthcare costs for work-related injuries and the question of efficiency.  Workers’ compensation is the first payer for medical costs of all work-related injuries;  medications, hospitalization, treatment, diagnostics, etc. are a big part of the combined indemnity and medical expense “pie” of workers’ compensation expenses.   NCCI projects the medical slice of that pie to be 58% for 2015.  Under Frank’s proposal, these costs would simply be part of the overall costs of the medical plans (single or multi payer systems as may exist in the jurisdiction).  Any connection to work or incentive to reduce causes would be lost and every plan member would subsidize the medical costs of work-caused injuries.    

The other 42% slice of that pie, the indemnity cost of work-related injuries, is also a concern.  Under each of Frank’s alternatives,   the indemnity cost would be pooled with non-occupational injuries limiting the data and incentive for prevention.  Insurance pools for both medical and income protection would effectively subsidize the cost of work-related injuries.   

There is little debate that “single payer”  universal medical insurance systems are more efficient, however, jurisdictions with them typically exempt workers’ compensation medical costs in order to avoid transferring work-injury costs to the universal healthcare system.  Of course, you could you could force work-related injury costs to be tracked and funded within the single payment system but if medical costs are delinked from the adjudication and claim process, there would be increased costs to administer, track and monitor the claim status.  Any increase in efficiency of payment would likely pale to the increased administrative burden.

Who actually pays?

The question of who bears workers’ comp costs is always a matter of debate. Of the economics and social sciences estimates in the literature, I recommend Chelius and Burton’s two part analysis as reasonable discussions on this topic (see links at the end of this post).   They conclude “…a substantial portion of workers' compensation costs (and even, according to some estimates, all of the costs) are shifted onto workers.” 

Answering the question, “Who funds workers’ compensation costs on a collective basis?”  may be subject to some debate but there is no debate that injured workers bear much of the non-compensated financial losses and all of the physical, emotional and psychological costs of workplace injury. Arguing that all labour (injured workers and non-injured) collectively pay the cost does nothing to lessen the reality of individual suffering and loss. 

It is important to remember that all insurance works essentially the same way.  Insurers agree to take on the financial risk of a rare but costly eventuality in exchange for a premium that notionally will cover the expected losses (and administration, underwriting expenses, profit, etc. ) for a pool of similar entities facing a similar risk over a given time.  Ultimately, all insured home owners with fire insurance or car owners with auto insurance will fund the actual cost of accepted losses.  For the insured, the transfer of the financial risk is convenient, levels costs,  and helps limit the impact potentially huge but rare losses.  Just because the risk of your home burning to the ground has declined over time is not usually given as a reason for suggesting we eliminate fire insurance.  If the risk is low and the cost of claims is low, the cost of insurance will generally be very low.  That is the case for many workers’ comp classes.  And just as is the case for car and home insurance, direct premiums and perhaps experience rating (discounts and surcharges) provide incentives to the nominal payer to limit losses. 

Property and casualty insurance lines are well defined as they stand.  Current disability insurance takes into account the existence of other lines including workers’ compensation.  One implication of Frank’s proposal would be a re-write of disability insurance plans to account for the influx of potentially large numbers of cases among the minority of workers who actually have disability plans.  It might also mean the creation of new state-mandated disability insurance plans in the majority of states that don’t currently have them nor see the need to develop them.   

Although each of the alternatives Frank mentions provides benefits, the terms for disability insurance are often very different than they are for workers’ compensation.  Generally, workers’ compensation payments are tax free and often provide higher net or spendable income than their disability insurance counterparts. Disability plans often have duration limits whereas their workers’ compensation counterparts often pay as long as the disability lasts (or for substantially longer terms than most private disability plans).   The difference between what workers and their families lose in wages and what they recover through workers’ compensation temporary total disability is already a direct loss to them.  Frank’s alternatives would increase that burden on the very people who must already endure the physical and psychological costs of work-related injury.

Frank’s approach would mean a complete re-writing of industry classification systems as well.  You may want to cover a CNC lathe operator in a small to medium sized aerospace parts manufacturing plant but exclude the clerical and sales staff working in the same enterprise building.   Exactly how would you do that?  And when there is an exposure to all workers in the building due to a chemical spill or an explosion that injures the lathe operator, sales rep and file clerk, would you exclude the file clerk and sales rep from coverage and force them to seek remedy through tort?  This seems unwieldly and unfair… and was precisely why workers’ compensation was agreed to in the first place.

I suppose one could argue for a threshold limit,  a “seriousness” test beyond which a case might be covered by workers’ compensation; the loss of a hand, for example, might be considered so serious as to warrant coverage under workers’ compensation whereas the loss of a fingertip might not.  The problem with this logic is twofold.  First, you would have to know a priori that a serious injury is possible in order for the risk and the individual to be insured.  In reality, many risks are not evident until they actually manifest in an incident, near miss or injury.  Second, there is no incentive to eliminate minor injuries; the cost of worker injuries is diluted and indistinguishable from other causes in Frank’s alternatives.  It becomes nearly costless for industry to allow a thousand workers to suffer minor wounds as long as it avoids any that exceed the seriousness threshold.  The loss of finger tips is more common than the loss of hands but the safety failures that lead to either are often the same.  In my view, all work injuries are serious;  collecting the data on all injuries and confining the costs to the workers’ comp system are the best ways to eliminate the root causes of work injuries—something workers’ compensation does effectively and efficiently.   

Also omitted from the argument is the public policy objective workers’ compensation is designed to achieve:  to protect workers from work-related injury, disability, illness and death in a compassionate and sustainable way that still allows the economic activity and innovation necessary for societies to operate and thrive.  The “exclusive remedy” that workers’ compensation provides is consistent with the social policy objective and was a unique part of the “grand bargain” or “historic compromise” that is the basis of workers’ compensation in Canada and the US.  Removing 90% of workers from this protection would expose US industry to individual and class actions with the associated litigation costs for workers’ employers and the taxpayers who fund the courts.  Workers’ compensation was designed to eliminate these costs.  Retaining the exclusive remedy in any of Frank’s alternatives is not eliminating workers’ compensation but merely renaming it. 

Occupational illness and disease

Although Frank assumes occupational illness and disease are similarly declining, I am less certain.  We can see many examples of workers’ compensation systems accepting mental (psychological) illness/injury, cancer and other conditions that were previously routinely denied as work related.  As we begin to exploit larger data sets and integrate new research findings into workers’ compensation policy we will undoubtedly discover more connections between work and illness, potentially increasing the occupational “disease” cases covered by workers’ compensation. 

Are there opportunities to change and improve workers’ compensation?  Of course!   Every workers’ compensation system has its shortcomings but the same can be said of any other disability or health care plan.  Every plan must innovate and evolve.  There exist hundreds of examples in many countries that demonstrate the adaptability of the workers’ compensation paradigm.  There are alternatives within the workers’ comp framework to deal with low risk and low cost injuries without disenfranchising workers, employers or society at large from the benefits of workers’ compensation coverage.  In Australia, for example, some states have a sort of employer deductible whereby the first five to ten days of wage loss benefits and medical costs are paid directly by the employer before the workers’ comp insurance (or  “workcover”) starts to pay. 

Rather than a relic of the past century, workers’ compensation is a vital and evolving social contract with a proven record of adaptability to new information and conditions.   Workers’ compensation continues to incentivise investments in safety and health, contribute to lower injury rates and provide the impetus for improved worker outcomes including return-to-work.  Rather than eliminating these benefits for 90% of workers, it is time to extend the coverage to those currently excluded from coverage (such as agricultural and domestic workers in many jurisdiction) or those with limited coverage (such as those in concurrent employment). 

James R. Chelius and John F. Burton, Jr. 1992. “Who Actually Pays for Workers’ Compensation?” Workers’ Compensation Monitor, Vol. 5, No. 6 (November/December): 25-35.  To download, click here: WCM Who Pays? Part I

James R. Chelius and John F. Burton, Jr. 1994. “Who Actually Pays for Workers’ Compensation?: The Empirical Evidence.” Workers’ Compensation Monitor, Vol. 7, No. 6 (November/December): 20-27.  To download, click here: WCM Who Pays? Part II