Spiraling Cost of Workers' Compensation

STARTING up a new plastics recycling plant in this small town northwest of Portland, Maine, has had its challenges for young entrepreneur Melanie Meyer.

She and her brother have worked together for the past one-and-a-half years to keep their small business afloat during tough economic times. Despite her plant's safe work environment and recent investments in safety equipment, she had to lay off half of her work force when she was hit with a 10.5 percent workers' compensation rate increase.

"When economic times are such as they are right now, those worker's comp rates can really be a matter of your going out of business or staying in business," Ms. Meyer says.

Workers' compensation is a hot political issue in Maine, with rates here among the highest in the country. Business owners like Meyer are frustrated with a system that that they say burdens them with increasingly high costs. Some companies have already left the state.

And the problem of high costs is not unique to Maine. Employers all over the country, including state governments, are struggling to keep up with a system that seems to be running out of control. Escalating medical costs, time-consuming litigation, administrative backlog, and fraud have all contributed to the problem.

State governments are struggling to come up with solutions to the problem. According to Governing magazine, workers' compensation is one of the top ten state legislative issues in 1992.

The workers' compensation system, administered by state governments, provides cash benefits, medical care, and other assistance to workers injured on the job. The idea is that employers pay injured workers' costs through insurance to avoid expensive, time-consuming legal battles.

"I think the state has got to start rewarding companies for a good job rather than continuously assuming that you're not running a safe operation," Meyer says.

Where does all the money go? It doesn't always end up going to injured workers, say critics.

Of the total funds that go into the workers' compensation system in Maine, for example, only about 40 percent make it into the hands of injured workers, says Willis Lyford, press secretary for Maine Gov. John McKernan (R). A large chunk of money ends up going to lawyers and the health- care industry, he says.

Athough rates vary widely within states, the average employer's contribution was 1.26 percent of payroll in 1984 while by 1989, it had risen to 2.25 percent, according to John Burton of Rutgers University, who edits a newsletter on the topic.

Insurance companies as well as employers say the system needs to be reined in to keep costs down. Liberty Mutual, the country's largest private underwriter of worker's compensation, pulled out of Maine, Rhode Island, and other states where rates were not considered high enough for the company to remain competitive. The three remaining carriers in Maine are threatening to leave the state.

"You have an [insurance] industry that has been losing money in this line for a long time," says Edward Furey, senior writer and publications editor for the National Council on Compensation Insurance, a research and statistical organization for the insurance industry. "It's hurting insurers, it's hurting employers. It's a system that is crying out for reform."

Governors in Maine and California refused to approve their state budgets last year until workers' compensation reforms were enacted. Two states, Kentucky and Alabama, are holding special sessions to address the issue. And legislative battles are expected in several other states.

A budget stalement lasted 16 days in California last year when Gov. Pete Wilson (R) refused to sign a spending plan without workers' compensation reforms. The resulting compromise tightens eligibility for stress claims for new employees but also retains a provision that allows workers to receive stress benefits if only 10 percent of stress is job-related.

Currently, employers in six states now offer workers' compensation benefits for stress-related claims.

Pat Pavone, chief of benefits and training for California's personnel administration department, says employees can file stress claims when an employer takes disciplinary action. One of her employees, who wasn't fulfilling his job duties, filed a stress claim against the state after he was fired.

In Maine, Gov. John McKernan, Jr. (R), who pushed for a 35 percent cut in worker's compensation rates, shut down the government and furloughed 10,000 state employees for nearly three weeks last year until the Legislature agreed to reforms. A compromise measure resulted in some cost-cutting measures and a tightening-up of long-term benefits. But the issue is still considered unresolved.

Labor union advocates say high workers' compensation costs are due to an increasing number of injuries on the job and an unsafe work environment.

"Reform is not cutting benefits from workers who have been injured," saus Patrick McTeague, a labor attorney and counsel for the Maine AFL-CIO office. "Reform is preventing an injury, reducing the number of injuries and preventing disabilities, and providing opportunities for injured people who want to work," he says.

High costs are due, in part, to the state's large number of potentially dangerous jobs in the fishing and paper industries, says Mr. McTeague.

"The typical injured worker is someone who has done the hard, dirty, dangerous, and essential work of this society in the natural resources field, manufacturing, and construction," he says.

Fraud is often citied as a problem that also drives costs up. In California, recruiters from doctors' and lawyers' offices openly solicit workers from unemployment offices and encourage them to draw up fraudulent claims.

"The whole intent of the California workers' compensation system is to provide benefits to truly injured workers in need and not to those who file fraudulent claims," says Lori Kammerer, spokeswoman for California for Compensation Reform, an advocacy group for public and private employers. "If we can do away with fraudulent claims, we can provide benefit increases to those who are truly in need."