No Pain, No Gain?

When Hollywood’s Border Grill closed in July, it didn’t make big news. Los Angeles had lost one of its best nouvelle Mexican restaurants, and 20 people had lost their jobs. But those things happen all the time.

That’s precisely why people should have paid attention. Like many large and small businesses across the nation, the Border Grill was forced to close largely because of soaring worker’s compensation insurance costs.

"We seat 35 people in the restaurant," owner Barbara McReynolds told a Los Angeles Times food columnist. "Now our insurance company wants us to pay $40,000-a-year for worker’s comp. And that was before [state Insurance Commissioner John] Garamendi approved that rate hike."

All across the nation, businesses are closing, laying off workers, or forgoing expansion because of soaring worker’s compensation costs. Recent surveys by the National Federation of Independent Businesses, the nation’s largest association of small businesses, reveal that as many as one-quarter of its 600,000 members have laid people off or forgone new hiring specifically because of worker’s comp costs. Nationally, the number of worker’s comp claims doubled during the 1980s– even though the U.S. industrial-accident rate remained flat.

For several years now, reform of worker’s comp has been at the top of the legislative agenda of most states. But, says Alan Philp, a consultant to California’s Senate Republican Caucus, "Everyone agrees there is a problem, and there’s remarkable agreement on what the sources of that problem are. But it’s difficult to get any consensus on how to solve the problem."

Worker’s comp originally had two goals: to guarantee benefits to employees and to keep employers from going to court after every workplace accident. In 1911, Wisconsin became the first state to enact a worker’s compensation law. By 1920, 40 states had enacted such laws. Today, all 50 states have mandated worker’s compensation.

Worker’s comp pays medical expenses and part of lost wages to employees hurt on the job, regardless of fault. In return, employees forgo the right to sue for any damages. The system is state mandated; almost all employers are required to carry the coverage, and almost all employees are covered. Most employers get their coverage through private insurers, but some big companies self-insure. State insurance departments regulate rates and set benefits. In almost all states, a worker gets at least two-thirds of his regular weekly pay until he recovers, and his medical bills are fully paid.

Worker’s comp systems were supposed to keep the costs to employers down while taking care of injured workers. But today, neither of those promises is being kept:

• Labor leaders complain that worker’s comp benefits haven’t gotten more generous despite the rising costs. In California, for example, only 23 cents of each premium dollar eventually reaches an injured worker. The rest goes mostly to doctors and hospitals (32 percent) and to lawyers (insurers’ expenses eat up about 26 percent, most of which goes to fighting lawsuits).

• The costs to business are rising. In 1991, employers poured more than $70 billion into worker’s comp. Insurance premiums took annual double-digit jumps during the 1 980s. The number of worker’s comp claims more than doubled, while the amount paid out in the average claim more than tripled. It now exceeds $19,000. In 1991, worker’s comp premiums accounted for 2.1 percent of the average employer’s payroll, up from 1.26 percent in 1984, according to the Bureau of Labor Statistics.

• Despite the increases in premiums, insurance companies claim that they cannot turn a profit on worker’s comp in many states. In fact, the insurance industry lost $1.4 billion on worker’s comp in 1991.

• Litigation is soaking more and more dollars out of the "no fault" systems. In Illinois, litigation expenses now amount to 14 percent of all dollars paid out. In California, where the rate of litigation grew from 6.8 percent of all cases in 1981 to 13.8 percent in 1991, the Senate Republican Caucus found that the total cost of litigation exceeds the amount of money paid to doctors to treat workers.

Designed in the 1920s, worker’s comp systems have simply failed to keep up with the times. They haven’t adjusted to changes in the workplace, changes in other forms of health insurance, and, most important, changes in people’s attitudes toward work and toward cheating.

When worker’s comp was first enacted, workplace injuries were plain to the eye: broken bones, severed limbs, missing eyes. If a lumber-mill worker lost a finger to a band saw, the only issue was who was at fault–not whether the finger had really been cut off, whether the accident had really happened at work, or how the injury should be treated. A no-fault system could make everyone better off.

Today, factories are safer, and more people work in offices. As a result, workplace injuries are more complicated, harder to assess. If someone files a claim for a bad back, the employer may question whether the worker actually has such an injury, whether it occurred at work, and whether the proposed therapy is the best treatment. Modern injuries lend themselves more to exaggeration and outright fraud and, as a result, to lawsuits over whether claims are legitimate.