Published August 2004

Workers’ compensation in need of serious reform

By Paul Guppy
Guest Editorial

A friend of mine says every time he hears mention of workers’ compensation insurance he gets MEGO — “my eyes glaze over.”

His reaction is a natural one. Most people know little and care less about the state-mandated worker insurance program. But there is one group of citizens that knows the program all too well: our state’s employers, who foot the bill for the rapidly growing cost of this government program.

The current system was created in 1911 to provide sure and certain benefits to workers injured on the job while protecting employers from costly personal injury lawsuits. The program affects everyone in the state. It is funded by over 160,000 employers, covers roughly 1.9 million workers and last year collected about $1.2 billion in premiums.

The Department of Labor and Industries, the state agency that runs the program, imposed a 29.4 percent rate hike in 2003, followed by a 9.8 percent boost in 2004. Agency officials will likely impose a third increase in 2005. Since each year’s increase compounds previous ones, the average employer’s workers’ compensation costs have soared 42 percent in just two years. Inflation over the same period has been around 3 percent.

And there’s the problem. Mounting insurance costs lead to job losses, layoffs and wage cuts, and have a harmful effect on the economic vitality and business climate of the region. Anyone who cares about the economic well being of our state should care about workers’ compensation, and how to make it more affordable.

Much of the financial strain in the system is the result of structural weaknesses and lack of competition. Washington is one of only five states where buying private workers’ compensation insurance is illegal. Except for the few companies that are big enough to self-insure, all employers are forced to purchase insurance from the sole provider: the state. In contrast, employers in Idaho can choose from among more than 250 insurance companies when buying workers’ compensation coverage.

Not surprisingly, lack of competition has resulted in higher costs. With its captive “customers,” L&I has little incentive to seek efficiencies that hold costs down. The system pays out some of the richest benefits in the country and collects some of the highest premiums, yet our state does not lead the nation in workplace safety. In 2001, workers in Washington sustained, on average, 37 percent more injuries than the average worker in the United States. In 2002, the figure was 38 percent more.

Washington’s workers’ compensation system is badly in need of reform, and by looking at examples from other states we can get a good indication of what works. Here are some ideas to improve the system in our state:

• Make sure workers’ compensation trust funds are used only for program administration and benefits. Today, money from the trust fund dedicated to workers’ compensation is used to pay for things that are entirely unrelated to the program. All money collected for the trust fund should be used solely for administration and to pay out benefits to injured workers. Everything else should be funded through the regular agency budget.
• Require annual financial audits. Currently, the system is not subject to rigorous, independent financial oversight. Annual audits would build greater accountability into the system, letting employers and the public see whether trust funds are being managed wisely.
• Legalize small group self-insurance. Washington law bars groups of small employers from joining together to self-insure, reserving that option only to large companies. All employers should have equal access to self-insurance, as is the case in 35 other states.
• Legalize private insurance. Washington is one of only five states that make it illegal to buy workers’ compensation coverage from a private insurance company. Legalizing private insurance would bring choice, quality service and price competition to the system, to the benefit of employers and workers.
• Clarify the calculation of benefits. No-fault insurance is supposed to keep costs low by eliminating the need for expensive lawsuits. Yet some judges, in a hodgepodge of recent court rulings, have forced new fixed costs onto the system. The Legislature should regularize and simplify benefit levels to avoid legal disputes.

The original purpose of workers’ compensation was to provide fair and reliable relief to injured workers while giving employers protection from litigation. Rulings by judges and the natural inefficiencies of a state monopoly are steadily wearing the system down. Commonsense reforms will return the system to its core mission: providing security, financial predictability and fair treatment to employers and workers, and contributing to a stable business environment for all Washington citizens.

Paul Guppy is research director for the Washington Policy Center, an independent, nonprofit research and education organization. For more information on the center’s newest study, “Reforming Washington’s Workers’ Compensation System,” call 888-972-9272 or go online to www.washingtonpolicy.org.

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