Excerpt from The Handbook on State Health Care Reform, co-authored by John C. Goodman, Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal, and Joe Barnett.
Workers’ compensation is often neglected in discussions of state health care reform. That is unfortunate, because employers who think they have achieved real savings after a significant change in their group health insurance plan often discover their lower health insurance costs are partially offset by higher workers’ compensation costs.
The reason: Employees often exercise discretion (even if they are not supposed to do so) in choosing whether to file a claim for a medical condition under workers’ compensation or under group health insurance. Thus, when employers make health insurance coverage less attractive, often their workers’ compensation claims rise.
Ironically, although workplaces have become much safer in the past several decades and job-related injuries have declined, the costs of state-mandated workers’ compensation insurance have soared. Costs are increasing because state systems provide incentives for employers, employees, and others to behave in ways that cause costs to be higher than they otherwise would be.
Six Big Problems
In general, the current system has six underlying problems: one, employers and employees are unable to choose more efficient health coverage; two, employers and employees are unable to choose more efficient disability coverage; three, employers face imperfect incentives to create safer workplaces; four, there is an inefficient market for workers’ compensation insurance; five, there is a lack of portable insurance coverage; and six, employers and employees are unable to modify strict employer liability by contract.
The following discussion considers how these problems might be solved.
Step 1: Expand Health Insurance
Group health plans frequently require employees to pay some of the costs of their health care directly, through copayments and deductibles. This encourages employees to economize on their use of medical services and avoid wasteful overconsumption.
Under workers’ compensation, by contrast, employees typically face no copayments or deductibles. As a result, when they (and the doctors who treat them) obtain excessive tests, schedule excessive doctor visits, and abuse the system in other ways, the costs of their overconsumption are borne by others. Unsurprisingly, treatment costs for similar injuries are higher when paid for by workers’ compensation insurance compared to group health plans.
Ideally, employers and employees should be able to cover workers’ compensation claims under the employer’s regular health plan. For employers without a group health plan, the legislature or department of insurance could designate a list of acceptable plans from among those common in the labor market.
Integrated health care plans would provide both group health and workers’ compensation medical benefits to employees. They would have the following advantages:
- Employees could use the same provider networks for job-related injuries they use for regular health coverage, and in most cases they would have the option to change doctors or (for an additional fee) go out of network if not satisfied with the services provided.
- Employers and insurers could use the same negotiated fee schedules for work-related injuries and illnesses as under regular health plans–fees that are generally lower than those paid by workers’ compensation.
- Since employees would pay the same deductibles and copayments as in their regular health plan, there would no longer be any incentive to claim that a non-work injury or illness is work-related or vice versa.
- Where workers are given a choice of health plans, they would be able to choose a single plan to cover both types of health needs.
Savings from the introduction of integrated health plans would be passed on to workers as higher wages or other types of benefits. Some employers already allow employees to choose less-expensive plans and “bank” the premium savings in health savings accounts (HSAs), from which they can pay small medical bills. Employees could be given a similar choice for their workers’ compensation coverage.
Alternatively, employees could use the workers’ compensation premium savings to purchase other benefits or make deposits into a disability account (described below).
Step 2: Expand Disability Insurance
Federal law also prevents employers from integrating workers’ compensation wage replacement benefits with their regular disability insurance. This is unfortunate. Compared to private disability policies, workers’ compensation generally has a shorter waiting period before a claim can be filed and often has a lower wage replacement rate.
The current system keeps employers and employees from choosing more efficient ways of delivering income replacement benefits. It also forces employees to accept more of their compensation in the form of income-replacement insurance when they might prefer higher wages or other benefits. The following reforms would help remedy these problems:
- Employers should be able to self-insure and pay disability claims directly–reserving third-party insurance for catastrophic claims.
- Employers should be allowed to integrate workers’ compensation wage replacement benefits with their regular disability plan so that employees face the same waiting periods and wage replacement rates whether an injury or illness is work-related or not.
- Small employers without disability plans should be allowed to provide a benefit resembling standard disability policies sold in the state or one replicating disability benefits available to state employees.
As with the health insurance reform discussed above, the cost savings from these reforms would be used to pay higher wages or applied to other benefits.
Also, employers should be allowed to offer, and employees to accept, options for employees to self-insure for some of their disability costs. For example, in return for a worker accepting a disability plan with a 90-day waiting period, the employer should be able to put the premium savings in a disability savings account that belongs to that employee. The build-up in this account might roll over into a retirement account when the employee leaves the company or retires.
Step 3: Free the Actuaries
In general, the insurance premiums employers pay cover benefit and claim management costs in each state. However, not every employer in the insurance pool has the same incentive to promote safety. Firms that are not individually rated do not reap the full rewards of safety improvements, nor do they bear the full cost if safety deteriorates. Thus they have less incentive to promote safety.
To correct this problem, state systems should re-rate companies that take steps to reduce injuries and charge them lower premiums. Conversely, the state should charge higher premiums when a firm’s safety record deteriorates.
Step 4: Free the Employers
The inefficiencies in state workers’ compensation insurance markets arise primarily because employers are not able to choose more cost-effective forms of insurance.
In several states, large employers have access to high-deductible policies under which they self-insure for smaller claims. These employers have added incentives to promote workplace safety because they pay workers’ compensation costs directly and thus directly benefit from a reduction in claims costs. In many states, however, smaller firms are not allowed to self-insure.
Step 5: Free the Workers
Workers’ compensation premiums are based on the collective claims history of all of a firm’s employees rather than individual workers. A better approach would be to reward or penalize workers for their individual behavior, by making workers’ compensation coverage individually owned and portable, traveling with the employee from job to job.
A step in the direction of portability would be to allow employers to establish Workers’ Compensation Accounts (WCAs) for each employee who agrees to select more limited, conventional coverage (see below). The WCA could be funded by the employer’s savings on insurance premiums, and any unused balance would move with the employee to a different job or could be paid out in cash upon retirement.
Step 6: Allow Liability by Contract
Workers’ compensation today pays 100 percent of a worker’s medical costs and replaces wages after a short period away from work. Thus the incentive for injured workers is to prolong the period away from work in order to receive cash benefits without having to work for them. But what if workers were willing to trade less complete coverage for higher wages or other benefits?
For instance, workers might be willing to pay a deductible toward their medical costs or receive wage replacement only after 90 days away from work if they shared in the resulting premium savings.
Such an agreement might state the employer’s liability is strict only if the employee follows certain safety rules and, if not, the employee bears some of the costs of the injury. In return for agreeing to such changes, there would have to be a showing that employees have materially gained. For example, if employers want workers to accept $1,000 of exposure, the rules could say the employer has to deposit at least $200 in a WCA each year.
Disability insurance could also provide direct financial incentives to workers for safe behavior and impose financial penalties for unsafe behavior. Such incentives would discourage excessive claim filings and, when a worker is injured, encourage a prompt return to work.
For more information …
More information about the State Health Care Handbook: http://www.ncpa.org/pub/special/20071112-sp.html
The State Health Care Handbook: http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf