Over the past few years, the United States workers' compensation industry has been the subject of much contention. Poor underwriting results driven, at least in part, by escalating claim costs have highlighted the need for reform in several states. At the same time, others have been pressing for enhancements to what they view as inadequate benefit levels for injured workers in some of these same states.

The state of Florida's workers' compensation system is an example. This system has experienced a tumultuous history for more than 20 years. During this time, significant legislative activity, both in terms of debated and enacted changes, has persisted.

Many problems continue to plague the Florida workers' compensation industry. Although the interested parties – labor, employers, insurers, physicians, attorneys, and regulators, to name a few — have hotly debated causes and solutions, there are clear signs the system is not operating effectively. For example, although some feel that the statutory workers' compensation benefits are low relative to other states, Florida's average cost per claim is among the highest in the nation. Furthermore, the incidence of Florida claims being compensated with permanent total benefits is more than three times the national incidence rate.

The most recent bill to have had a significant impact on Florida workers' compensation is SB 50A, which was passed in a special session in early 2003 and signed into law by Gov. Jeb Bush. The bill includes two major areas of change in regard to permanent total disability (PTD) benefits.

The first is semantic. In an effort to address the unusually high incidence of PTD claims, the definition of catastrophic injury has been revised to remove any reliance on Social Security criteria. Social Security language relating to disability was being used to identify which workers' compensation claims qualified for PTD benefits. Given that PTD benefits are significantly higher than other benefit types, there have been strong incentives to manipulate this Social Security wording in individual cases in an effort to make these claims PTD-eligible. This led to the inordinately high incidence level of PTD claims in Florida.

Although many feel that this new definition is more appropriate and should result in fewer claims' qualifying for PTD benefits, there is a potential loophole when an injured worker cannot engage in sedentary work within a 50-mile radius of his residence. From an excess of loss perspective, claims affecting higher layers typically are truly catastrophic in nature and, likely, still will be compensated as PTD. It is unlikely, therefore, that the new definition will have an impact on those layers.

The second area of change involves lowering PTD benefits. The annual cost of living adjustment factor has been reduced from 5 percent to 3 percent, and PTD basic and supplemental benefits will cease at specific age thresholds, which closes some loopholes from prior reform efforts. These changes can be expected to reduce indemnity costs on PTD claims, including catastrophic ones.

Permanent Partial Disability

Several changes have been enacted that will affect permanent partial disability (PPD) claims, with some clearly increasing costs and others intending to decrease costs. PPD weekly benefits now will be set at 75 percent of temporary total disability benefits, an increase from the current rate of 50 percent. However, these benefits are lowered by 50 percent per week if the employee returns to work and earns equal to or greater than the pre-injury wage. In addition, the statutory durations for PPD benefits are being increased for those at least 22 percent impaired, and decreased for those less than 22 percent impaired.

Furthermore, supplemental wage loss benefits have been eliminated, the portion of the PPD impairment associated with psychiatric impairment is now capped at 1 percent, the portion of a subsequent workplace injury that is related to a previous injury no longer is a consideration in determining the impairment rating, and various limits have been placed on training and education benefits.

From an excess of loss perspective, these changes may have some impact on working layers but are projected to have little or no impact on higher layers. Under the current law, Florida PPD claims tend to be less than $100,000 in total cost. Although the re-definition of some PTD claims into the PPD category should result in higher average PPD claim costs, these claims will tend to affect only working layers. Factors such as return-to-work wages and impairment ratings are not significant for catastrophic claims.

Death benefits also will be affected by SB 50A. Funeral and maximum aggregate benefit amounts have been increased by 50 percent. Florida death claims tend to be modest in cost, however, and the increased benefits are not likely to affect layers attaching at $500,000 or higher.

Other revisions affect medical services, including hospital and physician fees. SB 50A will increase maximum reimbursable amounts for physicians and surgical procedures, and reduce reimbursements for hospital outpatient services. These changes were scheduled to go into effect Jan. 1, 2004, and implementation details were not yet available as of this writing.

Currently, the employers or insurers and claimants can have one independent medical exam per medical specialty, with the employer or insurer paying for the claimant's IME. Under the new law, IMEs will be capped at one per accident, and the employer or insurer will not be required to cover the costs. This change may deter doctor shopping, but the number of IMEs should not be a significant cost driver for catastrophic claims affecting higher layers.

For pharmaceutical fees, reimbursement rates are being reduced from 20 percent above the average wholesale price for a prescription medication (plus a dispensing fee), to the average wholesale price level (plus the same dispensing fee). Prescription drugs can represent a significant portion of the medical costs on catastrophic claims and, as a result, this fee reduction should reduce costs on excess layers.

The new law increases allowable chiropractic treatment from 18 visits or eight weeks of treatment to 24 visits or 12 weeks of treatment. Although limitations on chiropractic services could affect catastrophic claims in high excess layers, they will be a very small proportion of total medical costs on those claims.

Other Important Changes

The new law also addresses compensability standards, the construction industry, and attorney fees. Florida's workers' compensation system has a very high incidence of attorney involvement. This tends to be a driver of higher claim costs, as claims involving attorneys are significantly more costly than similar claims without attorneys.

Attorney fees have been based on a schedule providing for 20 percent of the first $5,000 of the benefits secured, 15 percent of the next $5,000, 10 percent of the remaining benefits to be provided during the first 10 years, and 5 percent of the remaining benefits thereafter. However, alternative hourly fee arrangements could be approved. Under the new law, these alternative arrangements no longer can be used. The only exception is for medical-only claim petitions, which will have a cap of $1,500 on fees.

Also, assuming that an offer has been made to the claimant or his attorney at least 30 days before the final hearing, the benefit secured amount for the purposes of attorney fee computations now is limited to the amount of benefits awarded at trial above the settlement offer.

If applied as intended, these provisions should reduce attorney involvement, as well as provide clear incentives for attorneys to settle cases instead of dragging them out. From an excess of loss standpoint, this should have beneficial effects on working layers. For higher layers, attorney incentives should be less of a driving factor as long as the insurer is appropriately managing catastrophic claims.

Compensability standards will be affected by four different provisions that seek to clarify the standards. Objective relevant medical findings now are required, and benefits will not be provided when the only basis of the claim is pain or subjective complaints. “Clear and convincing evidence” is needed to prove causation of occupational diseases or repetitive exposures. A work-related accident must be more than 50 percent responsible for injuries and subsequent disabilities.

In addition, mental and nervous injuries unaccompanied by physical injuries requiring medical treatment are not compensable. Physical injury must be a major contributing cause of the mental/nervous injury. Mental/nervous benefits will not be paid beyond six months after maximum medical improvement for physical injury or 104 weeks, whichever is first

Because claims affecting excess layers tend to be clearly compensable, it is anticipated that these provisions will have no impact on the claim costs for those layers.

A number of changes relate to limitations on construction exemptions from workers' compensation coverage, along with enhanced enforcement and compliance. The impact of these provisions may vary significantly by insurer, based on elements such as portfolio mix and current premium audit standards. For excess of loss coverage, it is not anticipated these changes will have a large impact on claim costs.

SB 50A may be instrumental in keeping Florida's workers' compensation costs under control, and in ensuring that workers' compensation benefits are being provided to injured workers whom the system is designed to protect, indemnify, and rehabilitate. Whether it truly succeeds will depend on a variety of factors. As of this writing, many implementation details were still to be determined. It also remains to be seen whether the legislative intent of SB 50A will stand the test of time, as laws such as this sometimes are subject to distortion and erosion over time.

From an overall cost standpoint, the National Council on Compensation Insurance estimated that SB 50A would reduce Florida's workers' compensation costs by 14 percent (excluding the effects of revisions to medical services and reimbursements and revisions related to construction exemptions and enforcement, both scheduled to take effect Jan. 1, 2004). As a result, Florida's workers' compensation rates were reduced 14 percent effective Oct. 1, 2003.

From an excess of loss perspective, it is anticipated that the savings will be far less for two reasons. The first is outlined above: many of the provisions will not affect the more severe claims. Also, as medical costs are a dominant proportion of the total benefits on truly catastrophic claims, savings in indemnity costs will have much less of an impact on excess layers. The combination of lesser savings and the 14 percent reduction in rates will place pressure on reinsurance costs for treaties covering these layers.

It is important that insurers and reinsurers closely monitor the post-SB 50A environment in Florida to evaluate how it affects workers' compensation costs in practice.

Robert Blanco is second vice-president, workers' compensation product team, for GE Insurance Solutions.

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Assessing Florida&#039;s Workers&#039; Compensation from an Excess of Loss Perspective

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