What's New

Zack Hutchins
Director of Communications

January 24, 2007

Workers' comp reform: Finally coming in 2007?

This story originally appeared in the January 2007 issue of Business Council Connect, the Council's monthly newsletter for members.

In Buffalo, Curtis Screw Co. LLC pays more than $4,000 per employee – a total of $1 million a year – for workers' compensation. At the company's virtually identical facility in North Carolina, the cost is $550 per worker.

In the Hudson Valley, the Pawling Corp. saw comp costs jump 26 percent in 2006, even though worker injuries were declining. In most states, the manufacturer of architectural and engineered products calculates, workers' comp expenses would be half the cost in New York.

Across the Empire State, employers tell similarly troubling stories. The Business Council's recent survey of members found business leaders ranking workers' comp second only to health-care costs as a threat to New York's competitive position.

All told, workers' compensation cost New York employers some $5 billion a year in 2004, almost as much as all the state's business taxes combined. The National Council on Compensation Insurance (NCCI) reports that the cost of an average case is higher here than in any other state – $19,737, some 85 percent above the nationwide median.

Those high costs are especially striking, considering two factors.

First, workplaces in New York are safer than those in most states. Our rate of on-the-job injuries and illnesses is 17 percent below the national average.

Second, benefits for injured workers are relatively low in New York. The maximum weekly wage-replacement benefit, $400, is less than half those in some states, and near the bottom of the list nationwide.

How can the system impose high costs on employers, and provide only modest benefits for workers – especially given a low rate of injuries? The answer is a classic example of Albany protecting a relative few who benefit from the status quo, while ignoring the needs of most workers and businesses.

A primer on benefits

In New York and elsewhere, workers' compensation pays medical expenses and replaces a portion of lost wages when employees are hurt on the job. The amount of wage-replacement benefit – also known as indemnity – varies depending on factors that include the extent of the injury and its effect on the employee's ability to return to work.

More than half of comp cases involve only medical payments, with no benefits for lost days because the employee has no work interruption or uses sick time or other regular benefits. Injuries that leave workers completely unable to work, for a short time or for an entire career, are classified as “temporary total” or “permanent total.”

The other major category of comp cases – the area employers consider most in need of reform – is “permanent-partial” disability.

Such cases made up 17 percent of all comp cases in 2003 – but a whopping 81 percent of costs, according to the New York Compensation Insurance Rating Board.

Permanent-partial cases are usually far less costly in other states, and for good reason. Forty-two states limit the length of time for which workers can collect such benefits – typically seven to 10 years. The assumption is that, unless an individual is totally disabled, he or she can eventually return to productive work, perhaps in a different occupation. New York allows workers to collect such benefits for a lifetime.

That can add up to tens of thousands of dollars in additional payments, compared to the amount such an individual would receive in most parts of the country. In other words, a relatively small number of cases drains the system of significant resources that could be used both to increase benefits for the majority of injured workers, and to reduce employer premiums.

New York's system of permanent-partial disability practically invites abuse, many employers say. The permanent-partial classification includes injuries such as lower-back strain that are hard to assess definitively. Business owners and managers report instances where supposedly injured workers have been videotaped power-lifting weights, playing sports and even working other jobs. Some workers file workers' comp claims as they approach retirement, so the benefits will supplement their company retirement plan and Social Security income.

Solutions on the way?

The Business Council has argued for years that fixing New York's outmoded approach to permanent-partial disabilities is one essential step to lower costs. In remarks at The Council's 2006 Annual Meeting, then-gubernatorial candidate Eliot Spitzer agreed.

“To really bring our workers' comp costs in line with other states, we must confront the challenge of reforming our system of permanent partial disability payments,” Spitzer told Council members. “All ideas, including caps on benefits for all but the most serious injuries, must be on the table as we bring our program into line with other states. These changes should be accompanied by aggressive rehabilitation and retraining programs, so that workers can get back in the work force.”

As Governor-elect Spitzer prepared to take office, his transition team asked the Business Council and the state AFL-CIO for recommendations to help shape a reform proposal that could be presented to the Legislature early in the 2007 session. Indeed, Business Council President Kenneth Adams and AFL-CIO President Denis Hughes met with Governor-elect Spitzer the day after his election. The meeting, called at the request of the governor-elect, was an opportunity to discuss making progress on key economic issues including workers' comp reform.

The Council has urged creation of a defined schedule of up to 500 weeks for permanent-partial disabilities, coupled with a review procedure for the most serious injuries. That would encourage a return to work by giving workers adequate time to acquire new skills, while focusing greater financial resources on those with the most severe injuries, according to Elliott A. Shaw Jr., The Council's director of government affairs.

A related flaw in New York's comp system involves the state's legal “schedule” of benefit periods for certain injuries. For instance, a worker whose injury carries an automatic benefit of 20 weeks' wages might actually be able to go back to work after, say, eight weeks. Under current law, the worker would continue to collect full benefits for the remaining 12 weeks. The Council has urged that such benefits be reduced to half the maximum weekly benefit. Such a step would leave injured workers with additional resources, while reducing duplicative costs for employers.

Across the nation, 42 states use objective medical guidelines to determine physical impairment for determination of workers' comp benefits. Not New York. The state Workers' Compensation Board adopted optional guidelines in 1996, but medical determinations of similar injuries still vary widely depending on the physician and the worker. An independent think tank, the Workers Compensation Research Institute, said the existing recommendations for rating non-scheduled, partial injuries “provide general guidance at best.”

“We need to be sure that the evaluation and treatment of injuries is based on the best available medical protocols and review procedures,” Shaw said.

The impact of high workers' comp costs goes beyond the premiums paid directly by private employers. New York taxpayers will spend $216 million on workers' comp for state employees this year. An even greater (but hard to specify) bill for taxpayers comes from comp payments by local governments and school districts throughout the state. At the local level, “double-dipping” by workers who collect both comp and generous disability retirement benefits makes up a significant chunk of the cost.

With such costs affecting both New York's highest-in-the-nation tax burden and its uncompetitive business climate, workers' compensation reform is near the top of the list for steps Albany must take to strengthen the state's economy.

“Real workers' comp reform would represent an important step toward making New York more competitive,” The Council's Shaw said. “The business community has worked for years to build momentum for reform. We're very hopeful that hard work will pay off in 2007.”

A table showing the average cost per workers' compensation case in New York and other states, part of the Public Policy Institute's Just The Facts series of key economic and social indicators, is available at www.ppinys.org/reports/jtf/workerscomp.html.