The Business Council of New York State, Inc.
Testimony before the
New York State Insurance Department
on the

Proposed Workers' Compensation Rate Increase

New York State Insurance Department
25 Beaver Street
5th Floor Hearing Room
New York, NY

The Business Council appreciates the opportunity to testify today on the proposed rate filing by the New York Compensation Insurance Rating Board (NYCIRB). The rating board proposed an increase to manual rates of 12.6% and an increase to assessments of 3.9%. The Business Council and the employers we represent are concerned with the potential return to double digit rate shock. However, we are not here today to dispute the numbers or underlying reasons why this increase is being proposed by NYCIRB. Instead, we are urging that all parties quickly convene to consider further fundamental reform to the workers' compensation system.

Before we speak to this reform - we want to briefly look at where New York has been. As you know, in the early 1990s New York was in the midst of a workers' comp crisis. Average workers' comp premiums for New York employers had more than doubled - rising a full 165 percent - from 1987 through 1993. Workers' comp premiums were costing employers nearly $5 billion a year - which was twice what competitors were paying in other states. The high costs were making it impossible for companies to expand in New York and worse the uncompetitive rates were driving businesses and jobs out of the state. Fundamental reform was needed and it was needed immediately.

Fortunately for the business community, Governor Pataki, after he was first elected, vowed to tackle the failing comp system. The Governor and the Legislature achieved this through the Workers' Comp Reform Act of 1996. In fact it took the Governor holding up New York's 1996-97 budget to achieve it. These reforms and the subsequent attention given to the comp system are responsible for beginning to reverse the trend of historic rate increases and undo the damage done to New York State employers during that time.

One of the crucial reforms to the system was the significant repeal of the Dole v. Dow precedent. This precedent allowed employees to sue a manufacturer for making a product and then allowed the manufacturer to sue the employer. This kind of third party exposure raised liability for employers and made insurance premiums sky rocket. This provision cost businesses over $300 million per year. Its repeal reduced costs and made New York more competitive as New York was the only state in the nation to have this sort of liability.

The legislation also enabled the Department of Health to create a regulatory and administrative framework which allowed employers and insurers to utilize Preferred Provider Organizations (PPOs) arrangements. Although still in its infancy, this program has been given a favorable response by the business community and has had a major impact on the cost and delivery of health care services to injured workers. Currently more than 900,000 covered lives are eligible to participate in the program and to receive comprehensive health care for on-the-job injuries and illnesses. In the upcoming year we are looking forward to working with the Department of Health and the Workers' Compensation Board to make this program even more successful and beneficial to employers and employees.

The 1996 Workers' Compensation Act also took critical steps to combat and deter fraud within the workers' compensation system. Fraud is a statewide problem that has the capability of driving up costs for all businesses. This critical issue was addressed in the legislation. The new statute created a Fraud Inspector General who has the subpoena power and authority to report workers' comp fraud violations to the Attorney General, Insurance Fraud Bureau or the local law enforcement agency. To date the Department has handled literally thousands of complaints many which have been closed - leading to dozens of arrests, hundreds of prosecution and law enforcement agency referrals and over a million dollars returned to defrauded victims. The State Insurance Fund estimates a $6 million savings due to anti-fraud efforts in 1998 alone. We urge the administration to continue their efforts in the fight against workers' comp fraud.

While we are grateful for the above mentioned reforms and for the many administrative changes made by the Workers' Comp Board over the past 5 years - this cost of doing business still remains well above the national average. Although it is difficult to compare overall costs from one state to another, a Long Island actuarial firm has compiled what may be the most authoritative numbers for comparing the costs faced by one group - manufacturers. Actuarial and Technical Solutions, Inc. calculates "net insurance costs" based on actual manual rates in each state and adjusted for such factors as premium discounts and administrative assessments that are not already factored into manual rates. Its data shows NY's costs are 10th highest among 44 states. This data shows that New York's comp costs are still 20% above the national average.

One large segment of our membership who has not seen a vast reduction in comp costs are NY's biggest employers - the self insured companies. While workers' comp rates have decreased - those are insurance rates which do not affect self insured companies. We are often told by these companies that the most beneficial reform to them is the ability to fully and finally settle a case through Section 32 of the Workers' Comp Law. However, the self insureds largest costs - the benefit costs (which include schedules, classifications and determining degree of disability)- has not been changed.

To address their concerns and the concern of all of our members regarding the continuing high cost of comp - The Business Council's workers' compensation committee's top two priorities - reforms that we believe are essential in achieving a financially strong compensation system - are a cap of seven years on permanent partial disability benefits and the adoption of objective medical guidelines which I would like to talk briefly about now.

The purpose of the workers compensation system is to provide replacement income and medical benefits for employees injured on the job, until they regain the ability to go back to work. If a worker is permanently unable to work, it's fair for income and medical care to continue indefinitely. But the area in between - permanent, partial disability- is filled with shades of gray. And in recent years this type of compensation has become extremely costly for New York employers. The greatest single portion of incurred losses - nearly half of all costs- is paid as indemnity benefits to claimants with permanent partial disabilities.

One reason for the growing cost is that, unlike the majority of other states, New York allows workers with a partial disability to continue collecting benefits forever. That means workers' compensation checks don't stop even when the individual reaches the age he or she would normally leave work and live on Social Security, pension income and savings. New York is only one of 9 states that does not have a cap on PPD. These states have much lower costs per permanent partial disability case than New York. Connecticut has a 520 week cap and an average cost per case of nearly $21,000, Florida has a 525 week cap with a average cost per case of nearly $30,000 North Carolina 300 week cap and average case cost of $ 22,000 compared to New York with no cap and an average cost per case of $48, 150.

The average cap on permanent partial disabilities nationwide is 450 weeks. A cap is fair to employers; it makes the logical assumption that even workers who could not return to their old job because of an injury would, over a period of years, be able to undergo training or develop expertise in another type of job. It is important to note again that we are talking about partial disabilities - some of which are seriously disabling, but most of which are not. The idea of changing the law is to treat only those injuries that are seriously disabling as such.

In addition to placing a cap on permanent partial disabilities, The Business Council seeks the adoption of objective medical guidelines which will provide a more uniform and efficient approach to determining the degree of impairment in these cases. Thirty-nine other states use objective medical guidelines when measuring physical disability. Objective guidelines will: allow employers, carriers and medical practitioners handling workers' compensation cases a chance to be reading off the same page; reduce the use of lawsuits, thereby producing faster settlement; and save hundreds of millions of dollars that now go to legal battles and often questionable payments.

As well as being a top concern with The Business Council, the Greater Buffalo Niagara Partnership, the Rochester Chamber of Commerce and the Syracuse Metropolitan Development Association have recently joined forces to form the Advance Upstate New York coalition. This coalition, working with The Business Council, is committed to increasing economic revitalization of the Upstate Region. This coalition has pledged to use their collective resources to help bring about further changes to the comp system, specifically the two cited above.

The Governor has once again taken the lead towards continuing to reform the comp system and further drive costs down. We were extremely pleased that he has proposed legislation which would adopt AMA guidelines to measure physical disability for permanent partial disabilities and cap PPD benefits at 700 weeks. The Governor's legislation and leadership will play a key role in setting the agenda for continued fundamental reform of workers' compensation in the upcoming years.

Again, thank you for giving us the opportunity to testify today. I would be happy to answer any questions.