Thursday, March 1, 2007

Workers' Compensation Insurance Reform

Senator John Land published an editorial in the Greenville News on March 1, 2007. The letter was great and is copied below:

Workers' compensation makes insurance companies richWe must find out what's causing premium increases and fix that problem to stop seller from setting his own price to a captive buyer.Published: Thursday, March 1, 2007 - 2:00 am
By John C. Land III

Business, and particularly small business, is paying too much for workers' compensation insurance. The insurance industry would have you believe the reason is that greedy injured workers are receiving too much for lost wages and medical care. The truth is that the insurance industry is getting filthy, stinking rich due to a change in the law that allows insurance companies to set their own premiums.

There are only two components to a workers' compensation premium in this state. The first is the "loss cost," which covers medical costs and wage replacement benefits, i.e., the true cost of the claim. Increases in this portion of the premium must be approved by our state Department of Insurance. As in health care, these costs have risen because of increased medical costs. The second factor for these increases is that the cost of living has increased, thus resulting in a number of higher paying jobs over that time.

The second component in pricing workers' compensation insurance is the "loss cost multiplier," or LCM. The LCM includes the insurance company's profit and overhead. Increases in this portion of the premium were similarly overseen by the Department of Insurance until a change in the law that occurred in 2003.

This change, which the insurance industry pushed, allowed insurance carriers to set their own LCM, and thereby set their own premiums, free from any oversight whatsoever. And finding out where the money is going is like trying to push a wet string -- it's frustrating with no oversight. Since that oversight was removed, the average LCM has increased almost 200 percent over the last six years. This is the runaway train in the Workers' Compensation system and is the cause of skyrocketing premiums.

The insurance industry will tell you that overhead is high because of the Second Injury Fund (SIF). I have heard the insurance industry lobbyists many times use the line that our SIF assessments are bigger than California's, and that sounds shocking. Do not fall for it. What they do not tell you is that the SIF does not keep the assessment money; rather, the SIF has to pay it back in reimbursements to the very insurance industry that paid it in. Once the reimbursements are accounted for, net assessments have actually decreased since 2002. In contrast, the loss cost multiplier, which is where assessments are accounted for in the premium, has seen an almost 200 percent increase since 2000, and the insurance industry has not told us why.

The insurance industry will also tell you that costs have increased because of inefficiency in the workers' compensation system. Nothing could be farther from the truth. In 2003-2004 the Commission handled almost 89,000 claims. Hearings were scheduled in less than 10 percent of the claims and actually held in less than 2.5 percent of the claims. The average time it takes to get a hearing from the date requested is less than four months and the average time it takes to get a review hearing of a decision is less than three months.

In 2004 there were only 262 appeals from the Commission to the Circuit Court. That means that out of all the claims filed, only 0.002 percent of the injured workers, the employers and the insurance carriers were dissatisfied with the Commission's review process.

I believe in the free market system. However, workers' compensation insurance is mandatory and the free market system does not work when the seller can name his own price to a captive buyer. We should focus on finding the real cause behind these premium increases and correct whatever that is. Otherwise, all we are going to improve is the size of the insurance executives' bank accounts.