Cost-Shifting of Workers’ Compensation Expenses: Study Says Third Parties Pick Up Most of the Bill

Cost-Shifting of Workers’ Compensation Expenses: Study Says Third Parties Pick Up Most of the Bill

By John Stahl, Esq.

A study that J. Paul Leigh, Ph.D., and James P. Marcin, MD, MPH conducted addressed cost shifting that occurred when the workers’ compensation system did not absorb the entire cost of a compensable incident. They reported their findings in an article entitled “Workers’ Compensation Benefits and Shifting Costs for Occupational Injury and Illness” in the Journal of Occupational and Environmental Medicine.

Arguably compensable costs were often shifted to:

  • Non-workers’ compensation insurance
  • Medicare
  • Medicaid

The research included the full range of benefits that workers’ compensation provided claimants.

Study Overview

The researchers based their findings regarding the number of workers’ compensation cases and the costs of those cases on data from the Bureau of Labor Statistics and the National Council on Compensation Insurance. Workers’ compensation costs for 2007 were estimated to be $51.7 billion, which consisted of approximately $29.8 billion in medical expenses and roughly $21.9 billion in other benefits. The study noted that the $51.7 billion included compensation for work-related harm that occurred in 2007 and for benefits for compensable harm that occurred in prior years.

Other information showed that non-workers’ compensation insurance absorbed $14.22 billion worth of medical expenses that workers’ compensation did not cover. Medicare covered an additional $7.16 billion of those expenses and Medicaid covered an additional $5.47 billion.

These results prompted concluding that workers’ compensation “costs were shifted to workers and their families, non-workers’ compensation insurance carriers, and governments.”

Study Methodology and Results

Leigh and Marcin approached the challenge of determining the extent to which “groups in society pay when workers’ compensation does not” by first examining data regarding “the costs for all occupational injury and illness that were not limited to solely workers’ compensation costs.” That data estimated that those costs totaled $249.64 billion in 2007. Medical costs were $67.09 billion, and $182.54 billion was attributed to indirect or productivity expenses.

The categories of indirect costs were:

  • Lost earnings ($110.02 billion in 2007)
  • Lost fringe benefits ($29.03 billion in 2007)
  • Lost home production ($43.49 billion in 2007)

The study determined that sources other than workers’ compensation absorbed roughly $37 billion of the $67.09 billion in total employment-related medical expenses and $161 billion of the $182.54 billion in indirect costs.

Further breaking down those numbers demonstrated that the workers’ compensation system covered 44.5-percent of total medical expenses related to occupational injuries and illnesses and 11.98-percent of indirect costs related to those incidents. One attributed reason for this was that workers’ compensation was designed to pay 100 percent of medical expenses for “qualified care” and between 50 and 67 percent of lost wages. That system was further not designed to compensate for lost fringe benefits or home production.

The breakdown of cost shifting regarding total costs for employment-related harm were:

  • Workers and their families paid $124.88 billion (roughly 50-percent)
  • Non-workers’ compensation insurance paid $32.92 billion (roughly 13-percent)
  • Federal government paid $26.76 billion (roughly 11-percent)
  • State and local governments paid $13.35 billion (roughly 5-percent)

Importance of Results

Leigh and Marcin determined that the fact that workers’ compensation absorbed roughly 21-percent of the “true cost” of compensable incidents showed that workers’ compensation premiums were too low. This was because the cost that employers paid for that coverage did not accurately reflect the costs of the insured risks. The study did not examine whether the extent to which the practice of undervaluing an insured risk varied among industries.

Concern included the cost shifting unfairly transferring the costs of compensable harm to “victims” and their families as well as to taxpayers and non-workers’ compensation insurers.

Bottom Line

There are indications that the majority of costs that should be compensable under the workers’ compensation system are shifted to other payers. Rectifying that will almost certainly trigger higher workers’ compensation premiums.

© Copyright 2012 LexisNexis. All rights reserved.

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