Vermont Looks to Heal Injured Workers’ Comp System

Workers’ compensation is the fast food of the insurance industry. Nobody notices it very much until there’s a case of indigestion, despite the important role it plays in the economy. As costs continue to increase, however, so does the search for the causes and for the economic Alka-Seltzer to cure them.

In Vermont, the search for the antacid has commenced as policymakers, proud of the state’s relatively high benefits for injured workers, are finding that such generosity has a downside.

“The high cost of workers’ compensation in Vermont is negatively impacting the health of Vermont businesses. Many Vermont employers have seen their premiums increase dramatically despite good safety records and few injuries. As the law mandates that all employers (with few exceptions) purchase workers’ compensation insurance, the rising cost of this insurance has directly impacted the bottom line of both large and small employers,” states an advisory report by the state’s Department of Labor.

“The rising cost of treatment and the increase in the number and duration of lost time claims have greatly increased the cost of this system to employers. The state may no longer be able to afford the generous statutory protections and benefits the system provides,” the DOL report warns.

The report puts the Vermont system’s costs and benefits in the context of the state’s economy and the workers’ compensation systems of other jurisdictions.

Some of Vermont’s current cost challenges stem from the reality that it is a small, rural state. Total workers’ compensation premiums in the state amount to only $140 million. Most Vermont employers have fewer than 10 employees. The report maintains that insurers shy away from writing policies based on experience of these small employers because “the premium will not be sufficient to cover even a single serious claim filed against the employer.” Because it is such a small state, there is not much room to spread the costs of risks and a few catastrophic claims can affect all policies. A Mercer study confirmed this reality when it calculated that three large claims in 2000 with total costs in excess of $10.5 million had a 9 percent impact on premiums charged to employers.

Being small has certain advantages, too. Vermont’s system is relatively efficient when compared to other states’ systems and litigation and attorney involvement, which play a large part in driving up costs in other states, register below average.

While policymakers can’t do anything about the size of the state, they are focusing on the state’s approach to benefits as a cause for concern. The DOL review of Vermont’s workers’ compensation laws and benefits suggests that the Green Mountain state is “out of step with New England and out of step nationwide” with benefits that are often “more generous” than those in other states; about 20 percent more generous by one estimate.

The DOL analysis cites the U.S. Chamber of Commerce Analysis of Workers’ Compensation Laws as proof. According to this report based on 2003 information, Vermont provides more generous benefits in the following areas: statute of limitations; minimum compensation rate; maximum compensation rate; cost of living adjustments; medical provider choice; vocational rehabilitation; absence of term limits; absence of medical (utilization) limits; and coverage for injuries.

The problem is not just benefit levels. Frequency and costs are also of concern. The report cites insurance and disability management consultant Peter Rousmaniere who found that for 2002, while Vermont’s benefits were 20 percent above the national average, its workers’ compensation insurance costs were 34 percent above the national average. In particular, Rousmaniere noted that the state’s injury frequency was 19 percent above the national average.

Rousmaniere blames a number of costs drivers for the Vermont situation: inadequate focus on safety, inadequate focus on return to work mechanisms, doctor shopping, inadequate case management and delays in benefit payments and adjusting.

The study singled out lost time claims as the greatest factor contributing to rising costs. Average lost time costs are high because they include permanent total disability cases, which pay out lifetime wage replacement costs, as well as all medical costs associated with the workplace injury.

Nationally, lost time claims average between $20,000 and $30,000 per claim and represent between 22 percent of all workers’ compensation claims filed. In Vermont, about 26 percent of claims are for lost time, at an average of $23,000—findings that are “within the range of values of the New England states examined.”

Even though the lost time claims frequency and average are within reason, these claims are a big problem for insurers and those concerned about costs because they account for between 90 percent and 95 percent of total workers’ compensation benefits paid, both in Vermont and nationally.

The study committee consisted of Michael Bertrand, commissioner of labor and industry; John Crowley, commissioner of banking, insurance, securities and health care; Steve Kappel, from the Joint Fiscal Office; and Sam Burr, from the Legislative Council. This committee in turn relied upon an advisory committee that included representatives from labor, business and insurance. Burlington insurance agent Fred Hackett, of Hackett, Valine & MacDonald, was among those on the advisory panel.

Among the issues discussed in the report is the feasibility of Vermont creating a mandatory reinsurance facility similar to that in Minnesota as one way of reducing the cost of reinsurance and, eventually, the cost of insurance. But DOL rejected this suggestion, arguing that the state is so small that the amount ceded to such a facility would be insufficient to produce any meaningful savings.

While members of Vermont’s Advisory Council, which oversaw the preparation of the report, do not claim to have all the answers and even disagreed on a number of suggested reform proposals, they were able to come up with some recommendations for ways to “reduce or stabilize” annual rate increases:

• The weekly net income calculation in computing the compensation rate should be eliminated.

• The Department of Labor and Industry and the Department of Banking, Insurance, Securities & Health Care Administration should collaborate on a legislative proposal to improve the effectiveness and enforcement mechanisms of the current fraud statutes.

• The state should reconvene the Medical Advisory Committee to amend the medical fee schedule to better address hospital based charges, durable medical equipment and pharmaceuticals.

• The Department of Labor and Industry should compile vocational rehabilitation data concerning the numbers and percentages of VR claims with: mutual settlement; return to work; if return to work, with original or different employer; unsuccessful return to work and the costs attributable to each result. Data should also indicate whether the claimant’s lack of income during the vocational period resulted in an abandonment of VR services.

• Officials should encourage alternative dispute resolution within the workers’ compensation division.

• The Department of Labor and Industry and the Legislature should clarify the standards for issuing interim orders and establish timeframes for the issuance of orders.

• A future workers’ compensation study should place a priority on addressing workplace safety.

• The workers’ compensation division should encourage optimal adjusting practice from insurance carriers.

Insurance lobbyists are expecting Gov. Jim Douglas to develop a legislative package addressing the concerns outlined in the DOL report soon and are waiting to see what he recommends.

To comment on this story, e-mail: cboyle@insurancejournal.com.

Topics Claims Workers' Compensation Vermont