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Workers' Compensation

WCRI’s Baseline for Evaluating Impact of North Carolina’s 2011 Workers’ Comp Reforms: A Measuring Stick That Falls Short

 By Vernon Sumwalt

WCRI’s “Baseline for Evaluating Impact of 2011 Reforms in North Carolina: CompScope™ Benchmarks, 12th Edition” (the “WCRI study”) tries to provide a measuring stick to evaluate the 2011 amendments to the North Carolina Workers’ Compensation Act in the years to come.

There are many different factors that will go into this evaluation, not to mention the perspective of the political environment in which the amendments were passed. The 2011 Reform was the offspring of the Tea Party’s takeover of the 2010 political landscape in most states, and North Carolina was no exception. The North Carolina Senate, consisting of 50 seats, saw a shift in power from a 20-Republican minority to a 31-Republican majority. The House of Representatives saw a corresponding shift from a 52-Republican minority to a 67-Republican majority. Capitalizing on fears from the Great Recession, the political mantra was job creation and, with some irony when it comes to workers’ compensation, smaller government. Early drafts of the legislation aimed to cut the duration of compensation to a more drastic level, and caps only force workers onto public benefits after receiving the maximum ration of compensation, thus increasing the size of government programs such as Medicare and Medicaid through the shifting of costs from work-related conditions.

In an effort to evaluate the effectiveness of the reform in upcoming years, WCRI has provided a multistate comparison of the pre-amendment system and further considers (1) the impact of the 2009 reduction in the Industrial Commission’s Hospital Fee Schedule, (2) the hybrid nature of North Carolina’s benefit system, which accommodates both wage loss and permanent partial disability models of compensation for injured workers, and (3) the Great Recession’s impact on the purposes of the 2011 amendments, which include helping injured workers return to work more quickly and lowering employer cost.

Hospital Fee Schedule. WCRI reported that the 2009 reductions in the hospital fee schedule had yet to be fully appreciated, which is true. Only eight months of data were available following their implementation. WCRI plans to address these reductions in a future benchmark study. In the meantime, WCRI reported that North Carolina had already experienced limited growth in overall medical costs per claim to 3% between 2008 and 2009, and this includes both inpatient and outpatient services. The 2011 amendments did little to address this concern, since the benefit of the 2009 reductions were still in their adolescent phase.

But hospital costs alone do not tell the full story. The WCRI study reports that nonhospital providers were “lower than typical” under the Industrial Commission’s fee schedule, which raises a concern over the quality of medical care available to injured workers. You get what you pay for, and providers receiving less pay forces providers of quality out of the field by economic necessity. This lowering of quality will likely have an incalculable effect on the duration of disability and the consequences of workplace injury.

Wage loss” versus “permanent partial disability” models of workers’ compensation system. WCRI next reported that before the 2011 amendments, North Carolina posted (1) higher income benefit payments per claim among sixteen states studied, (2) slower return to work rates that resulted in longer duration of temporary disability, and (3) larger lump sum settlements compared to other states. According to WCRI, the 2011 amendments address all of these concerns.

The concerning part about WCRI’s conclusion is that it appears to accept data at face value without questioning its validity. For instance, WCRI reports that lump sum settlements were higher in North Carolina compared to other states prior to 2011. With few to no exceptions, however, employers and insurance carriers represent entire settlement values as indemnity and have “zeroed out” future medical expenses on the closing reports filed with the Commission, which are completed and filed only by employers and carriers and never by injured workers. This is particularly true in denied claims. The result is an overrepresentation of the amounts allocated towards indemnity, and a discount to the amounts representative of medical costs. Over the years, the emergence of Medicare Set-Asides (MSAs) has made employers and carriers improve their honesty about some future medical expenses—or at least the Medicare-covered ones—since the Center for Medicare and Medicaid Services has required affirmative allocations to cover those medical items and services in qualifying settlements. (The medical items and services that Medicare does not cover are a different story.) WCRI should demand that its data include MSA allocations and amounts representing future medical costs related to an injury from participating providers of that data. Otherwise, a disproportionate shift towards indemnity occurs, and this is likely what has already happened for decades.

The Great Recession and beyond. Finally, WCRI conceded that the Great Recession was a significant unknown variable in its research. Common sense dictates that workers with medical restrictions can find alternative work more readily during periods of economic boom than economic bust. The connection between economic recession and the duration of disability compensation finds some evidentiary support in WCRI’s observations that wages were not a significant factor to North Carolina’s indemnity growth in 2009, that financial stress gave more incentive to settle cases than in previous years, and that the competitive job market offered less opportunities for all workers, not just those who suddenly find themselves to be insurable risks from previous workplace injuries. Plus, in measuring the effectiveness of the 2011 reform, one must keep in mind that periods of disability are prolonged in depressed economies, and this will likely affect the data in an unquantifiable way when researchers consider it several years from now.

The shortcoming with WCRI’s research is its assumption that logic guides the political process. Although an ideal to reach for, logical analysis had little to do with the elections in 2010. Fear and anger, on the other hand, were widespread. As WCRI acknowledges, North Carolina will face an issue of public policy as the 2011 amendments mature for almost a decade and the first members of the “500-week cap” club start to roll off the rosters of disability compensation. The inevitable cost-shifting that will occur is like a game of hot potato, in which the industry will try to pass along some of the costs of work-related conditions to other payors, contrary to the fundamental bargain struck in workers’ compensation legislation. One can only hope that logic prevails as future evaluations of this social issue evolve.

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