Has the Other Shoe Dropped? New Report Signals Feds Are Losing Patience with State Workers’ Compensation Programs

On October 5, 2016, the U.S. Department of Labor released a widely anticipated report on the adequacy of state-based workers’ compensation programs. While the 41-page report does not go as far as to call for a federalization of state workers’ compensation programs, it is replete with criticism of the nation’s state systems, describing the current situation as “a race to the bottom” [pp. 13, 20]. The DOL concludes that in recent decades many states have decreased benefits, raised the employee’s burden of proof required to prove a claim, erected significant barriers to necessary medical care, and shifted costs to public programs, such as Medicare and Social Security Disability Insurance. It posits multiple points that should be discussed by and among all stakeholders, including whether to increase the federal role in oversight of state-based workers’ compensation programs.

Stark Criticism of State “Reforms,” Including Oklahoma’s Opt Out Legislation

The report is particularly critical of so-called state “reforms,” including Florida’s 104-week limit on temporary total disability benefits and Oklahoma’s controversial Opt Out experiment, both of which were struck down earlier this year as unconstitutional by the respective state Supreme Courts. While the DOL acknowledged that since the striking of the original “Grand Bargain,” there has always been tension between stakeholders—injured employees, employers, and the public, it indicated the balance has generally shifted in recent decades to favor the employer. The Department says that now, in many states, an inappropriate percentage of the costs of work injury and illness must be paid by workers, their families and government benefit programs. The DOL adds that the result leaves many high hazard employers with little incentive to eliminate workplace hazards and prevent injuries and illnesses from occurring. Given the existing circumstances, the DOL concludes that injured workers, their families, and taxpayers actually subsidize unsafe employers.

DOL Report Responds to Congressional Pressures

The report was prompted, at least in part, by an open letter (“the open letter”) to the Secretary of Labor penned one year ago by five U.S. Senators—including unsuccessful presidential candidate Bernie Sanders—and an equal number of members from the U.S. House of Representatives, all decrying “a pattern of detrimental changes to state workers’ compensation laws and the resulting cost shift to public programs like Social Security Disability Insurance ….”

Historical Overview

As a contextual backdrop, the Report provides a quick overview of the development of the state workers’ compensation system, noting that in the beginning, a number of state acts got off to a rocky start. For example, one day after the initial New York workers’ compensation legislation was struck down by the state’s highest court, 146 garment workers lost their lives in the infamous Triangle Shirtwaist Fire in lower Manhattan. The DOL stresses that from the very beginning, state workers’ compensation acts were seen as a political compromise, worked out on a state-by-state basis, with input contributed by employers, insurance carriers, unions and public officials. Throughout the years, the role of the Federal government has been limited.

The DOL added that while the state acts had some characteristics in common, there was still significant variation. Moreover, none of the state programs was ever intended to make the injured worker entirely whole or to provide what he or she might recover in tort. On the other hand, none required the worker to establish fault on the part of the employer in order to qualify for core benefits.

The National Commission on State Workmen’s Compensation Laws

Continuing with its historical discussion, the DOL allowed that by the late 1960s, a crescendo of criticism related to the level of injured worker benefits had increased to the point that many in Washington, D.C. thought that something had to be done. Several bits of federal legislation were passed, including The Federal Coal Mine Health and Safety Act of 1969, the federal Black Lung Compensation Act, and The Occupational Safety and Health Act, but Congress continued to stay out of the broad workers’ compensation arena. Congress did, however, refer concerns about benefits adequacy to a newly established National Commission on State Workmen’s Compensation Laws. Chaired by Professor John F. Burton and consisting of 18 members, the Commission unanimously concluded in 1972 that “the protection furnished by workmen’s compensation to American workers presently [was], in general, inadequate and inequitable.” The Commission endorsed 84 recommendations, 19 of which they concluded were “essential."

The Commission particularly lamented the fact that economic competition among the states had created a political environment in which state legislators were reluctant to improve workers’ compensation laws. Parenthetically, I would add that such an environment has changed little. In 2013, the Oklahoma legislature pointed to the need to make the state more economically competitive as the primary reason for enacting its controversial Opt Out law.

Progress, Then Deterioration, in Benefits After Release of National Commission’s Findings

In its report, the DOL moved on by noting that significant improvement in the level of injured employee benefits was observed in the years that followed release of the National Commission’s Report. The Department adds that perhaps because of apprehension that the state systems might be federalized, states’ compliance with the 19 essential recommendations increased. The DOL observed that in 1972, the average state compliance was 6.8 of the 19 recommendations. By 1980, the average state had complied with 12.1 of them.

The DOL admitted that its own monitoring of the adequacy, equity and efficiency of state systems waned considerably after 1980. It allowed that as it became clear that federal intervention was improbable, the states’ motivation to conform to the National Commission’s recommendations faded. For example, in the 24 years from 1980 to 2004, the average compliance with the Commission’s recommendations rose only from 12.1 to 12.8. The DOL cited the incendiary 2015 ProPublica and National Public Radio study which, incidentally, was the primary impetus for the open letter from Congress noted above, showing that currently only seven states follow at least 15 of the recommendations, and four states comply with less than half of them.

The DOL concluded its historical context section by noting that benefits per $100 of payroll have declined since a high of $1.65 in the early 1990s, to $0.98 in 2013. Somewhat paradoxically, the average employers’ costs have not generally followed this same downward pattern, further fueling the political attacks on benefits. The DOL also lamented the fact that while most states have raised and maintained the level of weekly TTD benefits to conform to the National Commission’s recommendations, all too many have enacted other statutory changes that make it difficult to qualify for those benefits.

Adverse Changes at the State Level

The DOL points to a number of changes in many states that undermine those states’ arguments that they have substantially complied with the National Commission’s 1972 recommendations. Including in the DOL’s discussion are the following:

• Exclusionary standards result in increased denial of claims. Again citing the ProPublica/NPR report, the DOL suggests that since 2003, legislators in 33 states have enacted legislation that either reduce benefits or make it more difficult for those with certain injuries and diseases to qualify for them (or both). Particularly troublesome, said the DOL, has been the action, taken in many states, requiring that the work be the “major contributing cause” (or similar language) of the worker’s disability. As a result, workers who enter a workplace with preexisting disabilities—whether caused by work or not—may be denied compensation, despite the fact that they were able to perform their jobs before they were injured.
• Adequacy of cash benefits is decreasing. Even in some states whose wage replacement benefits meet the National Commission’s suggested minimum and who have refused to utilize the “major contributing cause” standard of proof, other insidious rules work to the injured worker’s detriment. For example, in California, physicians are often required to “apportion” the amount of impairment between work and non-work-related causes. Prior to an injury, the worker was able to work despite having pre-existing impairments. Often after the injury, they can no longer work, yet their level of benefits ignores this reality.
• Growth of programs and policies that may discourage reporting of injuries. State after state has passed legislation dealing with worker fraud and yet there is no evidence such fraud has increased the cost of workers’ compensation programs. The DOL says the public focus on worker fraud often stigmatizes injured recipients, suggesting they are faking their injury and taking advantage of the compensation system. To avoid this stigma, some workers fail to file claims.
• Restrictions have been instituted regarding medical care for injured workers. According to the DOL, in the face of rising medical costs, states have moved to control costs in a variety of ways, including fee schedules, employer rather than worker choice of physician, relatively low reimbursement schedules for providers, various administrative review processes for treatment choices including extensive utilization review, and the like. It isn’t clear, however, that any have actually reduced costs.
• New procedural and evidentiary rules create barriers for injured workers who file claims. The historical use of “liberal standards” to interpret workers’ compensation law so as to promote its beneficent effects has given way to complexity in the rules related to filing claims, such that now, attorney representation is almost always required. In the face of this complexity, a number of states have attempted to cap attorney fees. Few of these new rules have increased the efficiency of state programs.
• Elimination of Second Injury and other special funds adds to additional holes in the fabric of insurance and coverage. The DOL contends that the combination of (a) elimination of Second Injury funds and (b) the exclusion of conditions with multiple causes means an ever growing number of workers with conditions that are related to—although not wholly or principally caused by—their current work cannot obtain benefits.
• Opting Out of coverage altogether. The DOL fired an effective broadside at Oklahoma’s controversial opt out arrangement. Of course, the Supreme Court of Oklahoma had already applied the coup de grace.
• Changing work organizations result in added barriers to workers’ compensation for workers. The Department observed that the misclassification of workers as independent contractors results in their exclusion from much of the U.S. social safety net, including workers’ compensation.

Race to the Bottom Continues

The DOL had some positive notes, including the following:

• New Mexico’s exclusion of farmworkers was held to be unconstitutional on equal protection grounds.
• Florida’s claimants’ attorneys’ fee restrictions as well as its 104-week limit on TTD benefits were struck down.
• Utah’s restrictive attorneys’ fees schedules were overturned.
• As noted above, Oklahoma’s opt out law was struck down, as was a separate provision barred a claimant from obtaining any workers’ compensation remedy because she had not worked a continuous 180–day period for her employer.

Overall, however, the Department says the race to the bottom among the states continues. It adds that we know that the way the state systems are designed does not meet the needs of workers. We are far from universal compliance with many of the National Commission’s 19 essential recommendations and even those recommendations do not adequately address new issues that have arisen in the past 45 years. Low benefits and transfers of costs adversely affect the social and psychological environment for working people who already face many challenges in the current economy. Complex procedures frustrate both workers and employers. The DOL concludes:

The combination of unfiled legitimate claims, benefit caps, barriers to accessing medical care, and potentially inadequate settlements of permanent disability claims together mean that the direct costs of worker morbidity and death are transferred away from employers, decreasing any direct economic incentive to invest in safety [p. 24].

The result of the foregoing is the transfer of the economic cost of occupationally caused or aggravated injuries and illnesses to families, communities, and other benefit programs. The Department charges that the shifting of costs from state workers’ compensation programs to Medicare and the Social Security Disability program is no mere “accounting anomaly.” The result is to strain federal systems that are already under extreme stress.

The DOL: “What’s Next?”

How will the workers’ compensation community address the downward spiral? While the DOL makes no specific directives, it does note, “the current situation warrants a significant change in approach and action at the national, state and private sector level” [p. 24]. It adds that, of course, the most effective way to reduce workers’ compensation costs is to prevent work injuries and illnesses from ever occurring. In addition to strengthening efforts to prevent work-related injuries and illnesses, the Department points to a number of areas that it says should be explored, including:

• Whether to increase the federal role in oversight of workers’ compensation programs
• Discussion about the establishment of standards that would trigger increased federal oversight if workers’ compensation programs fail to meet those standards
• How to strengthen the linkage of workers’ compensation with injury and illness prevention
• Whether to develop programs that adhere to evidence-based standards that would assist employers, injured workers, and insurers in addressing the long-term management of workers’ disabilities to improve injured workers’ likelihood of continuing their productive working lives
• Whether to update the coordination of SSDI and Medicare benefits with workers’ compensation, in order to ensure, to the extent possible, that costs associated with work-caused injuries and illnesses are not transferred to social insurance programs

Labor Secretary Hints that the Federal Government is Ready to Step into the Breach

As the DOL’s report was being released, Labor Secretary Thomas Perez remarked, “With this report, we’re sounding an alarm bell. A critical part of the safety net is being both attacked and eroded in no small measure because there are no federal minimum standards for workers’ compensation.”
He added, “I hope that Congress will step up. We have to fix this system.”

For My Money, Federal Intervention is Still Exceedingly Unlikely

Most of us doubt, however, that Congress will have any appetite for meaningful reform of workers’ compensation at the federal level. Should Hillary Clinton win the White House, it appears she will still face Republican majorities in both houses down Pennsylvania Avenue. She will likely choose her battles carefully and a federal workers’ compensation program isn’t likely to be something for which she would expend her political capital. Alternatively, should Donald Trump win, it seems quite unlikely that he would suggest anything remotely like the sort of “reforms” suggested by the current DOL. No Republican signed the open letter sent to the Secretary of Labor last year.

Zero-Sum Mentality Likely to Continue at the State Level

For better or worse, I think the current sort of zero-sum mentality that is so prevalent in state legislatures is likely to continue. Manufacturing jobs, the sort that were so prevalent a century ago at the time state workers’ compensation systems began, have largely been involuntarily exported to countries that provide little, if any, benefits for injured workers.

That’s the way it was 120 years ago in North Carolina, long before the state’s Workers’ Compensation Act. In 1896, my paternal grandmother sustained a debilitating work-related injury when her supervisor restarted a set of textile spindles in a Gaston County mill while her hand was still in danger. She suffered the amputation of two digits of her right ring finger. She was eight years old; textile mill owners had discovered that little fingers were particularly adept at keeping the spindles clear if snarls.

Fifty years ago, Gaston County was the epicenter for yarn and thread production, with more spindles in operation than any other comparable area in the world. The Firestone Mill, which produced polyester cord for automobile tires, was the largest textile mill under one roof in the world. Today, virtually all the mills are gone. The county has seen a significant reduction in the number of work-related injuries, but it has come at the expense of its manufacturing core. Offices and retail establishments are safer than textile mills.

For all the strengths of the DOL’s report, it offers little analysis of—and shows little understanding of—the other tremendous changes that have occurred within the American workplace since the National Commission released its 1972 report. The DOL finds fault, most of it appropriately leveled, at states that have favorably responded to employer cries that workers’ compensation expenses have exploded without also paying appropriate attention to the levels of benefits paid to injured workers. The DOL yells, “Watch out states, because of your misbehavior, we’re coming for you.”

The states yawn and sigh, “We’ve heard that one before.”