Compensation Competition (Gwen Moritz Editor’s Note)

Workers’ compensation began as a simple concept. Employers would pay prompt, fixed, “first-dollar” compensation to workers injured on the job, without regard to fault. In return, the worker gave up the right to sue for additional compensation for, say, negligence or pain and suffering.

It was a tradeoff that took America by storm as the consequences of rapid industrialization became apparent. All but six states adopted workers’ comp systems between 1911 and 1920. Employers eagerly accepted the down side — that they would be responsible in some cases that probably wouldn’t have held up in court — in exchange for the up side of not having to worry about the worst-case scenario. Workers’ comp benefited workers, but it benefited employers at least as much by making the cost of doing business predictable.

This was especially true as states rushed in to regulate the premiums that workers’ comp insurance companies could charge. The rates weren’t just predictable — they were controlled.

The system worked fairly well for decades, but by the 1990s, the system had broken down in many states. Rapid inflation of medical costs collided with a system that had been designed to limit costs. State regulators, pressured to control costs, were hesitant to raise premiums as dramatically as the insurance carriers felt was necessary.

Meanwhile, the increasingly prohibitive cost of medical treatment outside the workers’ comp system encouraged workers to claim any injury or illness was job-related. Fraud became an increasing burden on the system, as did attempts to broaden the definition of “on-the-job” accidents. No workplace safety program could prevent a batter on a company-sponsored softball team from getting beaned.

Insurance carriers began voting with their feet. By the time Arkansas undertook radical reform in 1993, only three private insurance companies were willing to write policies to Arkansas employers. Most employers were in the “assigned-risk pool” — the last resort for companies that no carrier would cover voluntarily.

Senior editor Michael Whiteley’s articles about workers’ compensation issues in last week’s Arkansas Business made it clear that the reforms, like workers’ comp developments for most of a century, were designed to protect employers more than employees.

Act 796 of 1993 declared war on fraud and firmed up those blurry lines between on-the-job and off-the-job accidents. Most significantly, the new law seems to have virtually dispensed with the “no-fault” concept that was the basis of workers’ comp in the first place.

A factory worker who had trouble shutting off her machine attempted to repair a hose while the machine was still running and ended up with a mangled arm. This is exactly the type of case the original “no-fault” concept of workers’ compensation would have handled well. But this worker was out of luck — especially since a urine test showed that she had ingested marijuana sometime in the previous 30 days. In Arkansas, every injured worker is now presumed to be under the influence of drugs or alcohol unless he can prove he wasn’t. And if an employee doesn’t take every safety precaution, no compensation is due.

More frightening to those of us who don’t run heavy machinery, don’t use illegal drugs and don’t come to work drunk is the case of a cafeteria worker who slipped while getting some lunch from the salad bar where she worked. Yes, she was on a lunch break, but was she at work? An appeals court determined that she was still on the job and eligible for workers’ comp. Insurance Commissioner Mike Pickens said the court’s decision was “troubling” and a move in the wrong direction. I hope Mr. Pickens never slips while having a quick lunch in the break room at the Insurance Department.

The reforms have clearly improved the market for workers’ comp insurance in Arkansas. Nearly 300 companies are clamoring to write policies here, which ought to tell you something about who has benefited most despite a 35 percent reduction in premiums over the past six years.

But how much would those rates have dropped if Arkansas had adopted an even more daring reform: allowing the workers’ comp insurance companies to set their own rates? States that have shown faith in free-market competition have found it to be an astonishing cure for sick workers’ comp systems by rewarding efficient insurance companies without turning the market into an industry playground.

(Gwen Moritz is editor of Arkansas Business. She can be reached via e-mail at gmoritz@abpg.com.)



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