No Pain, No Gain?

Why worker's comp is out of control

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 1980s. 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.

Nationwide, back strain is the most common type of worker's comp claim—31 percent of all cases. It is also one of the most expensive to diagnose and treat; the average claim costs $23,916. In fact, various sprains and strains make up exactly half of all workers' comp cases. The trouble with this type of injury is that there usually is no clear-cut way to tell malingerers from those who are genuinely incapacitated. Indeed, the difference may not have anything to do with the injury itself.

Each year, almost half the American work force reports losing at least one workday because of back pain. But only 2 percent to 5 percent of those people file a worker's comp claim. For the last 13 years, Dr. Stanley Bigos, a professor of orthopedics at the University of Washington's medical school, has been studying back pain among Boeing workers to see what distinguishes those who file claims from those who don't.

"There was no relationship between physical activity and worker's comp claims. Workers whose jobs involved lots of heavy lifting didn't file at a greater rate than those who didn't," says Bigos.

Rather, a person's mental state seems to determine whether he or she makes a claim of back injury. "Those who say they are dissatisfied with their jobs or with life in general are much more likely to file than those who are happy with their jobs or lives," says Bigos.

Indeed, he notes that one job category he has been studying has had no back-pain claims since 1978, despite the fact that it involves more heavy lifting than most of the jobs at Boeing. "It's a high-status job," he says. "The people who do it have special uniforms. No one wants to lose that job and be sent down to hand out small parts from a bin."

Nationwide, the insurance industry estimates that around 20 percent of worker's comp claims involve cheating. But when the insurance industry talks about fraud, it means the real thing—faking injuries, filing claims for injuries that occurred outside the workplace, or pretending to be disabled after an injury has healed. But as Bigos's research suggests, there is another category of cheating that I call, for lack of a better term, "soft fraud."

There are two types of soft fraud. The first occurs when a worker genuinely feels that his general fatigue amounts to a disability, and the system allows him to collect on that fatigue. The second occurs when a worker tries to collect for a real disability that has a tenuous connection to his job. Since worker's comp has not adopted the cost-containment measures and eligibility restrictions that other forms of insurance have, people have an incentive to try to get all of their ailments covered by worker's comp.

Problems such as back pain, stress, cancer, hearing loss, and joint diseases can all be influenced by a person's genetics, personal habits, or emotional condition. These problems are rarely the result of a single incident; they arise gradually and may be due more to aging than to workplace conditions.

"If someone develops, say, cancer and his workplace might have contributed to it, he's probably going to convince himself that it did," says Orrin Kramer, an economist and consultant who studies the insurance industry. "It's just a question of getting covered by the most generous system available."

Many of these ailments can also be exaggerated or faked more easily than old-fashioned industrial injuries. And many people no longer feel any guilt about defrauding insurance companies. While no one has actually surveyed Americans to see how they feel about cheating on worker's comp, a 1991 study by the Roper Organization on auto insurance may provide some indication of what Americans think about the general topic of insurance fraud. In face-to-face interviews in 1,987 households, 23 percent said that it was acceptable to pad auto insurance claims.

If someone isn't already prone to file a fraudulent claim, there are other people who will prompt him. Doctors and chiropractors, in particular, have a financial incentive to urge workers to file false claims. Take, for example, Dennis L. Campbell, an Oregon chiropractor caught two years ago in a large state investigation of worker's comp fraud. Campbell told an undercover investigator complaining of an injury that there would be compensation if the injury occurred on the job. The secretly taped conversation went:

Campbell: "If this was a workman's comp, they'd pick up the tab."

Investigator: "I know."

Campbell: "Did you hurt yourself at work?"

Investigator: "No. "

Campbell: "Did you hurt yourself at work?"

Investigator: "No. "

Campbell: "Did you hurt yourself at work?"

Investigator: "Yeah, I did."

And sometimes people with once-real injuries continue to collect worker's comp payments long after they could return to work. Consider Tom Neilson, whom ABC's John Stossel confronted in a 1990 20/20 story on worker's comp fraud. After accidentally touching a power line, Neilson had claimed that he was disabled because he got nervous in social situations, was easily startled by loud noise and machinery, and suffered from tremors. But a private investigator videotaped him happily drinking beer at a crowded beach and racing a stock car at a noisy track.

Neilson's reaction when confronted with this tape: "I don't understand what gives them the right to go and tape me…."

Stossel: "What gives them the right is that you're asking them to pay you and you're cheating them. I don't see any tremors here."

Neilson: "This was three years after."

Stossel: "OK, so now you're better, go back to work. Stop collecting money from the state."

Neilson: "They say, 'Well, we can get you back to work at $4.60 or $3.50 an hour.' That's it."

Stossel: "Five bucks an hour is meaningful and gainful employment to lots of people."

Neilson: "Well, I guess to lots of people it is, yeah.

Stossel: "That's good enough for other people, but not for you? So, you I should support."

Neilson: "I had no control over the accident."

Stossel: "But you got better."

Neilson: "Yes."

Stossel: "You could work now."

Neilson: "Of course, I got better. I know…I can work, yeah, but not at $5.00 or $4.60 an hour, no."

This sense of entitlement is increasingly common, especially among younger workers. People seem to have the idea that wealth isn't something that is earned by hard work but is attained by luck or by jobbing the system. In a country in which people make bestsellers of books such as Wealth Without Risk, should we be surprised that people look at worker's comp as a source of easy money?

Outside the unemployment office on a busy commercial street in West Los Angeles, a dozen or so people are milling around. Two men stand out from the crowd. One, a Latino or Caucasian in his early 20s, hands out a lawyer's business cards to people as they enter the office. The other, an Asian also in his early 20s, is more energetic. He strides back and forth on the sidewalk, calling out, "Got headaches, backaches, bad dreams? You can get money—$350 a week."

These "cappers" get paid by lawyers or doctors for each person they drag in. What they're doing is technically illegal—the law forbids direct recruitment of worker's comp clients—but crackdowns are rare. (It is legal for law firms to advertise that they handle worker's comp cases.)

Unemployment offices are good hunting grounds for one big reason: plenty of disgruntled workers. (Remember Bigos's research.) And since California allows stress claims, unemployed workers can argue that the stress of being laid off or fired has left them unable to work. Indeed, as the state economy has soured, employees in firms that are rumored to be shutting down, moving, or laying off workers have started to sue because they have suffered stress because they may be fired.

Worker's comp benefits in California, as in most other states, are more generous for most workers than unemployment benefits. Following a Nixon administration recommendation, in the 1970s most states set worker's comp benefits at two-thirds of net pay. As the Los Angeles capper noted, a person can easily collect $350 a week for as long as his doctor says he is disabled.

The lure of easy money is hard to resist. "In every city, there are networks of doctors and lawyers who try to entice people to file workman's comp suits," says Leo Martinez, who runs a plastering business in Santa Barbara, California. He pays $18–$19 per $100 of payroll for worker's comp insurance. "I've had guys injured, minor stuff, and I send them to the doctor to get patched up. He automatically tells them about workman's comp and gives them the number of a lawyer."

Last year, one of Martinez's immigrant workers filed a worker's comp suit. He was awarded $240 a week plus rehabilitation expenses. And he got to collect the money even though he returned to Mexico. "That's about as much money as a banker makes in Mexico, and he doesn't have to leave his family to earn it," notes Martinez.

Still, Martinez finds it difficult to be angry with the worker. "I blame the system. TV is full of ads telling him he's got a right to this money, and he's a fool if he doesn't take it."

On weekday mornings and on weekends, California television viewers are inundated with commercials from law firms specializing in worker's comp suits. Usually they begin with actors performing little skits—falling off step ladders or lifting boxes—that end with the word "Oww!" Then a middle-aged white guy in an expensive suit tells viewers that California law guarantees them generous benefits if they've been injured on the job and that he will fight for their right to that money. One commercial ends with a stressed-out secretary and a warehouse worker with a back injury clinking champagne glasses on a yacht.

Almost every state legislature is considering reforms to "eliminate fraud and other excesses from worker's comp. Each state's system is different, so the reform packages also differ. But most contain at least some of the following proposals:

• Allow diagnosis by only one physician, either one agreed to by both the employee and employer or one sanctioned by the state worker's comp board. The physician's diagnosis and prescription would be final. This would eliminate any disagreements and end the costly legal wrangling that often occurs during worker's comp disputes.

• End self-referrals by physicians. In most states, physicians can now refer worker's comp patients to clinics in which they have a financial interest. Ending this practice reduces a physician's incentives to cooperate with or to entice a fraudulent claim. Attempts to limit self-referrals have been vigorously opposed by physicians' lobbies.

• Increase policing of the system. "We haven't been doing enough to deter fraud," says Louis Custrini, vice president of California's Merchants and Manufacturers Association. Employers in other states agree, but government officials are beginning to take action. In Pittsburgh, the city government reported a 15-percent drop in worker's comp claims last year after it televised videos taken by hidden cameras of supposedly injured police officers and firefighters working at second jobs, playing basketball, and fixing roofs. Since Oregon's state-owned worker's comp insurer, SAIF, began a massive crackdown on fraud in 1990, bringing more than 200 fraud cases to district attorneys and professional boards for action, it reports that premiums have dropped by 23 percent.

• Include some form of copayment. Unlike people with ordinary health insurance, patients in the worker's comp system pay no deductibles and no part of the bills, giving them no incentives to turn down tests or treatments. Introducing deductibles and copayments into worker's comp can also reduce an individual's financial incentive to cheat by taking money out of his pocket if he does so.

• Introduce cost-containment programs such as managed care. A 1990 study by the Minnesota Department of Labor and Industry found that the treatments for back injuries and sprains cost more than twice as much and lasted longer when charged to worker's comp than to Blue Cross. Cost-containment reforms would bring worker's comp in line with other types of insurance and reduce a worker's incentive to lie about an off-the-job injury to get the more generous coverage. It would also reduce physicians' incentives to encourage patients to pursue treatment for longer than is necessary in order to pad their own bills.

All of these reforms are good, and they should be introduced into systems that don't have them. But the central problem with worker's comp will remain. As long as a quarter of the American public feels that it's OK to cheat on insurance claims, people will try to find ways to job the system.

Indeed, the troubles in the worker's comp system are just a small part of a much larger problem with the American political system. Since Plato, philosophers have realized that the character of a nation's political system influences the character of its citizens and vice versa.

We have set up a system that not only allows but encourages people to lie and cheat. Should we be surprised that they have become liars and cheats? Or that they resist efforts to make it harder to lie and cheat, even if, in the long run, everyone would be better off?

"Ultimately," says Custrini, of California's Merchants and Manufacturers Association, "what this says about the American character, the work ethic is frightening."

Charles Oliver is assistant editor of REASON.

Stressed Out in California

Californians tap their worker's comp system 25 percent more often than Americans as a whole. A 1992 study by the state Senate Republican Caucus identified stress claims as the major reason for this higher utilization rate.

In the early 1950s, various states began to recognize that the emotional damages of a physical injury could themselves render a person unable to work. But in 1959 California expanded this notion by categorizing stress itself as a disabling injury. Most other states did not follow suit. California is one of only six states that allow stress claims.

For the next two decades, stress claims were a relatively small part of California's worker's comp system. But between 1980 and 1990—as it became legal for lawyers to advertise their services—the number of mental stress claims in California increased nearly tenfold. With awards approaching $13,200 each, mental stress claims cost California businesses over $500 million annually. And that doesn't count legal expenses.

Stress claims are litigated more often than other types of worker's comp claims. And the costs of preparing medical reports for stress claims are higher than for other types of injuries.

The problem is that there are no objective measures for stress disability. Who among us hasn't grown tired of his daily routine or had a disagreement with the boss or a coworker? Most of us manage to cope.

But what if someone said that we could take a break from work—with two-thirds of our salary—if we claim that the stress has left us unable to work? In effect, that's what California's worker's comp system does. In fact, it's even worse because to collect a California worker only has to prove that 10 percent of his "injury" is caused by his job.

To establish job-related stress, a worker complains of headaches, bad dreams, inability to concentrate. If he works around machinery, he says that loud noises startle him. If he works in an office or store, he claims that social contact now leaves him paralyzed by fear. And he goes to a therapist—very likely the one who will collect fat worker's comp "rehabilitation" payments to treat the worker during his convalescence—to confirm these symptoms. Employers know this, so they hire their own psychologist to examine the worker and fight the claim.

State legislators know California's system of rewarding stress claims needs to be reformed, but they haven't been able to make any meaningful changes. In fact, the one change they did make may have made things worse. As part of a 1991 worker's comp reform package, the legislature changed the threshold for collecting for stress-related disability. Previously, the workplace had to be the "predominant" cause of the stress. But businesses complained that that standard was too vague. So now employees have to prove that at least 10 percent of their stress is job-related—a lower threshold that is just as subjective.

Several different bills to change stress claims were introduced during the 1992 session of the legislature. One would have returned the standard for collecting stress-related disability payments to the old "predominant" cause. Another would have established a 50-percent standard. And another would have entirely eliminated cumulative stress as a disability for most workers. (Firefighters and police officers were excluded.) This bill would have allowed stress claims only for "sudden and extraordinary" job conditions. But intensive lobbying by lawyers led to the defeat of all these proposals.