Are the costs of workers’ compensation funded solely by employers?

I am not often asked, “Who pays for workers’ compensation?”  because most people think they already know the answer.  Most people think employers pay the full cost of work-related injury, illness and disease through premiums paid to a workers’ compensation insurer.  The true costs, however, are borne much more widely.

Workers pay the biggest price.  The loss of health, function, range of movement and even life itself is a huge cost that must be figured into the equation.  Families, friends, dependents, community members, and neighbours also bear the costs in terms of tangible losses in their lives.  In some provinces and states, workers also have to bear the first few days (for example, two-fifths of a week in Nova Scotia, three days in Washington State) as a waiting period.

In some jurisdictions the costs are also borne in part by the state.  For some cases, the appeal structures, prevention programs,  rate approval authorities, insurance commissioners, advocacy and ombudsman offices are often paid out of general revenues of the state or province.  Certain states fund these, in whole or in part, by direct assessments over and above the premiums charged to employers. 

In Oregon, for example, a charge of $0.028 (just under three cents) is collected from workers and employers for every hour —or part of an hour— worked, to fund cost-of-living increases to permanent disability and survivor recipients.  The workers and employers split this charge; workers generally pay this as a payroll tax or deduction and the employers match and remit the total to the state.  To augment federal funding, the state’s Occupational Health and Safety program assesses employers a straight 6.4% premium tax (2011; up from 4.6% in 2010). 

New Mexico assesses workers $2.00 and employers $2.30, per quarter, to fund the operation of the New Mexico Workers’ Compensation Administration (WCA), which regulates, adjudicates, and provides education and assistance services to the workers’ compensation system.

California recently announced its assessments for 2011 as follows:

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  WC Administration Revolving Fund Assessment/User Funding   0.014721             


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  Uninsured Employers Benefit Trust Fund Assessment                   0.004101         


• 
  
  Subsequent Injuries Benefits Trust Fund Assessment                   0.001776          


• 
  
  Occupational Safety & Health Fund                                                  0.002467            


• 
  
  Labor Enforcement & Compliance Fund                                           0.002315            


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  WC Fraud Account Assessment                                                          0.004348              

That totals 0.029728  or about 3% in assessments paid as a tax on premiums.  Self-insured employers have to pay assessments that currently total about 5.5%. 

Employers in many Australian jurisdictions are responsible for the first week or two of wage-loss benefits—a kind of employer deductible—and the first $592 of medical costs.

WorkSafeBC has no waiting periods, no employer deductibles, and no additional assessments over the published rates.  Workers still bear the cost of injury, loss of function, perhaps visible scarring or invisible pain.  Employers nominally pay the premiums but ultimately workplace injury, illness and disease are borne by all of us in the prices of goods and services we consume, the productivity of our workforce and even our standard of living.  We all bear some of the costs… All of us bear the responsibility to make work-related injury, illness, and disease unacceptable. 

Workers' Compensation and Unfunded Liabilities

A relatively new workers’ compensation officer asked me to explain ‘unfunded liability’ and why this would be a concern to a workers’ compensation system. The officer’s interest arose from a reading of the Ontario WSIB Annual Report for 2008 which stated:

Due mainly to the investment loss, the unfunded liability has increased to$11,469 million at the end of 2008. This is $3,375 million higher than at the end of 2007, when it was $8,094 million. The WSIB’s funding ratio has decreased by 12.9 percentage points to 53.5 per cent on December 31, 2008, from 66.4 per cent at December 31, 2007.

Funding workers’ compensation systems requires a longer view than most insurance systems. Injuries in one year may not be fully resolved within that year. In fact, many cases will require medical treatment, rehabilitation, and medical aid expenditure for decades. Permanent disability cases may also require funding for many years. Add in the cost to administer the claim and expenditures over time and it is plain that the true total cost of a claim will not be known for many years. For the workers’ compensation insurer, these future costs are ‘liabilities’.

Since payments against a claim will be made over time, workers’compensation insurers can estimate the amount of money they need today to make those payments into the future. Amounts that will be paid in the future are ‘discounted’ so they can be stated in current dollars. Using actuarial principles, past experience, and some assumptions about investment returns the insurer can place a ‘present value’ on the cost of the claim at or near the time the injury occurred. This present value is also known as the incurred cost of a claim. As long as the insurer has collected enough in premiums to cover the incurred costs of all claims, receives the investment returns expected and experiences costs over the lifetimes of the claims as expected, the insurer will have just enough money to cover all the costs associated with all the claims that arose in a given year. The idea is simple: premiums collected from current employers in a year should be sufficient to cover the cost of the work-related injuries incurred in that year.

Of course, things do not always go as planned. The costs of medical treatment may increase at a rate greater than expected. Investment returns may be less than expected. By comparing the current present value of all claims to the current value of all assets that may be used to pay those claims, an insurer can determine its funded status. If the value of its assets equals the present value of its liabilities, the system is ‘fully funded’. If there are more liabilities than assets, the system is under-funded and is said to have an ‘unfunded liability’. If the valuation of current assets is made when the market for those assets is depressed, the size of any unfunded liability will be larger than on a day when the market is elevated.

So,what if there is a large and persistent unfunded liability? Not necessarily. The situation may improve with higher investment returns, actions to achieve lower patterns of expenditure such as improved return to work outcomes and better health outcomes with lower disability. If these don't work, at some point the unfunded liability must be funded. Assuming benefits are held constant and patterns of disability do not change, the only other source available to cover the unfunded liability of past claims will be premiums or assessments paid by current employers. In effect, using premiums or assessments to offset an unfunded liability is an inter-generational transfer of the cost of work-related injuries from employers in the past to current employers.

There are other measures of financial health of a workers’ compensation system but the funded status is one of the most common in Canada. The AWCBC includes funded status in its report of key statistical measures. The 2007 results for all Canadian boards are the most recent funding ratios available without going to individual annual reports.