Legislative Update: November 2005

Is An Increase In Weekly Benefit Levels On The Horizon?

Attack On The Second Injury Fund

Legislative Update: November 2005
For a number of years, Organized labor has made increasing New York’s maximum weekly benefit level one of its top priorities. The last increase to the $400 per week maximum benefit level was in 1992. Currently, New York’s benefit level, as a percentage of the statewide average weekly wage, is the lowest of any state in the country. New Jersey, for example, has a maximum weekly benefit level of over $650 per week. Even in the business community, there is a strong feeling that labor may eventually succeed in increasing benefits.

Historically, however, the occasion of a benefit level increase has been an opportunity for the business community to seek reform of the Workers’ Compensation system to help pay for the increase in costs. For years, the broad outline of a compromise on this issue has been clear to all of the parties involved. For a variety of reasons, however, organized labor, and other interest groups have not succeeded in reaching a politically viable agreement on the subject of workers compensation reform. We have long argued that the only way to increase benefits while still keeping New York state businesses competitive with their neighbors is to modify the scope and availability of benefits. Most reform proposals contain some variation of the following measures:

Capping Permanent Partial Disabilities (PPDs)
PPD claims arise when a worker is found by the Workers’ Compensation Board to have a permanent condition that results in some loss of earning capacity, but is still able to work. If claimants do not return to work at their prior earnings, then they are entitled to benefits for the rest of their lives. Most other states cap the duration of these types of benefits. New Jersey, for example, will pay PPD benefits up to a maximum of 500 weeks. Thus, even though New York State pays a lot less than New Jersey, we pay it for significantly longer. Lifetime PPD benefits are what drives up New York’s compensation costs and accounts for the paradox of having a low maximum benefit level but high premium costs. Twelve percent of claims involve a finding of permanent partial disability, yet they account for over 70 percent of indemnity and medical costs.

Social Security and Pension Offsets
Workers’ Compensation benefits were intended to replace wages for workers who were ready and able to work, but who had suffered an injury. Under New York law, an employee who suffers an injury at age 64 can collect wage replacement benefits for the rest of his life, in addition to retirement benefits. Many states have an offset for pension benefits that reduces the amount of wage replacement claimants receive. As a matter of public policy, those states have determined that people should not be allowed to use Workers’ Compensation to supplement their retirement benefits. One recent bill proposed that fifty percent of social security benefits would be credited against Workers’ Compensation payments. In addition, employers who are also paying retirement benefits would be able to credit those against Workers’ Compensation payments.

Objective Medical Guidelines
Many other states use medical guidelines that are more objective and more consistent than the standard practice in New York. Medical guidelines are important because the claimant’s degree of disability affects the amount of benefit payments. Claimants’ doctors often give high impairment ratings, which lead to high lifetime benefits, in the face of only subjective findings. The goal of medical guidelines is to try to remove, to the degree possible, non-verifiable, unscientific practices from the adjudication of claims. The degree of impairment is also one of the most common areas of litigation on cases that are otherwise accepted by carriers. Thus, we believe objective medical guidelines would reduce the cost of claims in two ways: They would reduce frictional costs, while also eliminating expensive claims based solely on subjective complaints.

Labor Proposals that would increase the cost of the Compensation System
Organized labor has proposed a number of other changes to the workers compensation system that would expand the availability of benefits and hence increase the cost of insurance. One of the foundations of the Workers’ Compensation law is the "exclusive remedy." Workers give up their right to sue employers in exchange for the prompt payment of medical and indemnity benefits, regardless of the reason why the accident occurred. In the past, labor has proposed changes to the law that would allow workers to opt out of the Workers’ Compensation system and sue their employers directly if their injury were related to a hazard for which an employer had previously received a citation from OSHA.

Another favorite labor proposal is benefit level indexing. Indexing would peg the maximum benefit level to a cost of living index. Indexing benefits would, in all likelihood, provide for automatic increases This would allow labor to get a benefit level increase without ever having to go back to the Legislature. We estimate that this provision alone would raise premiums significantly.

Labor proposals have also included a number of other measures that could increase costs. They have proposed a measure that would force employers or carriers to pay the plaintiff’s legal fees if they lose controverted claims. Currently, legal fees are paid by claimants. Under the present law, claimants’ doctors must seek authorization for procedures that cost more than $500. Labor has proposed a measure that would raise that amount to $2,000.

Needless to say, New York businesses will not be able to remain competitive with our neighbors, much less the rest of the world, if we are burdened by the expensive proposals in the labor bill.

The Governor’s Attempts to Forge a Compromise
Governor Pataki has made several attempts to bring the parties together and achieve significant comp reform. In the 2004 session the Governor introduced an extensive program bill.(S6841, A10975) that attempted to forge a compromise between labor and business. The Governor’s bill was a complex document with over 50 sections that made both major and minor changes to the Workers’ Compensation and insurance law. On the whole, the bill was a reasonable compromise that would have made the maximum benefit period for permanent partial disabilities 500 weeks, while gradually increasing the maximum benefit level to $500 per week over the next four years. The Governor estimated that the net effect of his entire bill would have been a 15 percent reduction in Workers’ Compensation costs, with the bulk of the savings attributable to the section on permanent partial disabilities.

Recently, the Governor has proposed similar legislation for the state to address in 2006. As of this writing, we have not seen the bill, though we anticipate that the new bill will contain many measures that are similar to the 2004 bill.

We urge you to contact your legislators and Governor Pataki on this issue. Your involvement is critical, if you do not want to see a benefit level increase without other reform measures. When the legislative session begins, we will post sample letters on our website.

Is An Increase In Weekly Benefit Levels On The Horizon?
Currently, New York State has one of the lowest benefit levels—$400 per week—when measured as a percentage of the statewide average weekly wage. New York has not increased its maximum Workers’ Compensation benefit level since 1992. Our research and analysis has revealed that capping permanent partial disability benefits would allow for an increase in the maximum benefit level while still controlling the cost of Workers' Compensation.

Permanent partial benefits are paid to workers when the Workers' Compensation Board rules that there has been some permanent loss of earning capacity but the worker is judged capable of doing some kind of productive labor. As of 1999, a total of 39 states capped the length of time that permanent partial disability payments must be made to an injured worker. Seven more states have other mechanisms for limiting payments. Most caps are about 10 years. New York is one of only four states that pays lifetime permanent partial disability benefits. New York is an expensive state in which to run a business not because our benefits are too high, but because benefits are paid far too long. While there is still a possibility that a special session of the Legislature may pass a benefit level increase, we at Lovell doubt that meaningful reform will take place soon.

Attack On The Second Injury Fund
In February of 1999, Governor Pataki issued an executive order creating a Workers’ Compensation Special Funds Study Commission. The impetus for this Commission came from the insurance industry’s desire to eliminate special disability funds such as the Second Injury Fund, as well as the Re-Opened Case Fund, §15.8 and §25 A of the New York State Workers’ Compensation Law. These Funds play an important role for small and medium-sized employers in controlling their Workers’ Compensation Insurance costs. However, a 1997 accounting standard made these Funds less beneficial to carriers.

Although the insurance industry solved their immediate problems with legislation that changed their assessment calculation, Lovell anticipates they will still try to eliminate the Second Injury Fund. Make no mistake: Doing so would raise rates for policyholders, allowing insurance companies to collect more dollars while, at the same time, lowering their administrative costs. Many large self-insurers who have not made appropriate use of the Second Injury Fund may also see it as an unnecessary expense.

The Second Injury Fund limited employers’ exposure on serious claims to 104 weeks of disability and medical expenses when an employer could establish that an injury was materially and substantially worse than it would have been as a result of a pre-existing, underlying condition of the claimant. In 1996, the “Reform” legislation limited the employer’s protection retrospectively to 1994 by granting relief to the employer after five years of compensation and medical benefits. The difference between 104 weeks v. 260 weeks is more than $60,000 per claim. This change increased your cost in two ways:

• Individual experience ratings have lower credits and higher charges as more losses are put into the experience rating formula.

• Manual rates also rise because higher losses are entering the rating calculation.

The Special Disability Fund benefits all employers in the State, both on their experience rating and with lower manual rates. If it is phased out, employers will ultimately pay for the unfunded liabilities of the Fund. In addition, employers would have to be prepared for higher costs of claims, currently limited to 260 weeks, if the Fund were to be eliminated entirely.

Having provided Workers’ Compensation coverage to companies in a broad range of industries since 1936, Lovell understands the insurance industry, its current market, each Group members’ needs and the impact all these changes have on a risk’s bottom line. Eliminating the Second Injury Fund would result in rate increases and, despite what organized labor has been led to believe, would provide no savings for at least two to three decades. You can rest assured that Lovell will continue to advocate on your behalf to ensure that the Commission produces a balanced set of recommendations.